Graphics chipmaker NVIDIA's (NASDAQ:NVDA) shares plummeted 24% in after-hours trading yesterday after the company reported second-quarter profits 79% lower year over year. The news shocked the market (trading was even halted for a while) since NVIDIA management issued no warnings prior to the release.

NVIDIA CEO Jen-Hsun Huang cited numerous "unusual market events" as reasons for the poor performance. Perhaps he was referring to chief competitor ATI Technologies' (NASDAQ:ATYT) quarter of record revenue reported at the end of June, with net income trebling. The stark contrast between the results of the two companies is indicative of one thing -- loss of market share for NVIDIA, which admitted that desktop graphics unit shipments declined by 17%.

A big part of this is due to production problems with NVIDIA's flagship graphics processor units, the GeForce 6800 series. Although the chips were premiered in April, they were unable to ship in volume until late June. Meanwhile ATI announced its next generation family in May, available immediately. Guess whose products sold?

This is not a new predicament for NVIDIA, either. Numerous shipping delays of the FX5800 in early 2003 handed sales to ATI on a silver platter as ATI had the fastest card available.

Those unfamiliar with the graphics processor industry may wonder at the constant emphasis on the high end. While it is true that lower-end chips sell in volume, the top-of-the-line models command much higher margins. Also, gamers are notorious for treating the frames per second their systems can produce as a sign of machismo. These early adopters invariably buy the fastest units available, and the buzz they generate trickles down to aid sales of lower-end units. For this reason NVIDIA and ATI have played leapfrog over the years, competing fiercely for the coveted performance crown.

Despite its poor second quarter, NVIDIA has not lost the speed race yet. Benchmarks run on Activision's (NASDAQ:ATVI) recently released Doom III show NVIDIA's current top-of-the-line models beating ATI's. And the high number of back orders for these units between April and June indicates a healthy demand for them.

However, the way management continues to wear blinders with respect to production problems should be a red flag for investors. Graphics cards unavailable for sale do not contribute to the bottom line, no matter how fast they are. A performance crown means nothing if the emperor has no clothes.

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Fool contributor Tim Goh does not own any stake in the companies mentioned.