NVIDIA (NVDA +1.68%) recently launched two new Shield TV devices: the $149 Shield TV and the $199 Shield TV Pro. Both Android TV devices are powered by NVIDIA's new Tegra X1+ CPU, which runs up to 25% faster than its predecessor.
The standout feature for both devices is AI-powered "upscaling," which converts 720p and 1080p videos to sharper 4K videos with the Tegra X1's deep learning capabilities. Both devices are integrated with Alphabet's (GOOG 0.07%) (GOOGL 0.11%) Google Assistant and support Dolby Atmos surround sound and Dolby Vision for 4K videos.
Image source: NVIDIA.
The cheaper Shield TV sports 2GB of RAM and 8GB of storage, but lacks any USB 3.0 ports. The Shield TV Pro offers two USB 3.0 ports, 3GB of RAM, and 16GB of storage. NVIDIA's consumer business chief Jeff Fisher called the new models "a big step up for Shield, which has consistently delivered groundbreaking innovations in the living room since its introduction five years ago."
However, NVIDIA investors might be wondering if it's wise for the chipmaker to keep launching set-top boxes when it generates most of its revenue from chips. Let's take a closer look at NVIDIA's Shield business to understand why the company keeps launching new hardware devices.
Understanding NVIDIA's hardware strategy
NVIDIA's Tegra CPUs initially competed against other ARM-based chips in the smartphone and tablet markets. However, it eventually lost that market to Qualcomm. Instead of abandoning ARM CPUs, NVIDIA pivoted the line toward connected cars and first-party devices.
It installed the Tegra in its Drive PX platform for driverless cars, and launched its first family of Shield devices -- a handheld, a gaming tablet, and a set-top box -- to showcase the Tegra's abilities between 2013 and 2015. NVIDIA also initially tested the first version of its cloud gaming service, GeForce Now, on Shield devices.
The Shield tablet's performance impressed Nintendo (NTDOY +5.37%), which chose the Tegra X1 for its Switch console. As a result, NVIDIA now generates most of its Tegra revenue -- which rose 2% annually to $475 million last quarter and accounted for 18% of its top line -- from sales of Tegra chips to automakers and Nintendo.
NVIDIA also expanded its hardware ecosystem with Spot, a $50 golf ball-sized microphone that can be plugged into any electrical socket, in 2017. NVIDIA didn't position Spot as a competitor to big smart speakers like Amazon's Echo or Google Home. Instead, it synchronized with the Shield TV to control smart home devices linked to Google Assistant or Samsung's SmartThings platform.
Image source: NVIDIA.
Where does the Shield TV fit into those plans?
NVIDIA's new Shield TVs represent the third generation of its Android TV devices. It launched the second generation models (Shield TV and Shield Pro), which used the same Tegra X1 SoC as the 2015 model but added more storage in smaller form factors, in 2017.
NVIDIA also launched a China-only variant of the Shield TV with Chinese streaming video giant iQiyi in 2018. That version had identical hardware as the basic (16GB) second-generation model, but it replaced the Google Play Store with iQiyi's own app store and bundled several first-party games from Nintendo.
The Shield TV isn't a major streaming device like Amazon or Roku, which together control nearly 70% of the U.S. streaming media player market, according to Parks Associates. The Shield devices are also arguably tethered to a weak ecosystem, since Android TV only runs on about 10% of smart TVs worldwide, according to Strategy Analytics.
NVIDIA doesn't disclose its Shield device revenue separately. Instead, it's included in its "OEM and other" revenue, which fell 4% annually to $111 million last quarter and accounted for 4% of its top line. NVIDIA noted that unit's sales of embedded edge AI products rose sequentially during the quarter, but didn't mention its Shield devices at all.
A showcase product and a launch pad for cloud games
Therefore, it's safe to say that NVIDIA's sales of Shield devices won't significantly boost its revenue. Instead, NVIDIA is likely using the devices to showcase the capabilities of its new Tegra X1+ chips, which could attract more customers and boost its total Tegra shipments.
NVIDIA also likely considers Shield TV to be a potential launchpad for its upgraded GeForce Now cloud gaming service, which remains in beta tests on PCs and Macs. If NVIDIA launches GeForce Now on its new Shield TVs, it could widen its moat against nascent rivals like Google Stadia.
Investors should realize that those are NVIDIA's long-term goals, and that the chipmaker probably isn't interested in going toe-to-toe against companies like Amazon and Roku in the streaming device market.
