Last week, NVIDIA (Nasdaq: NVDA) came out and issued a revenue warning, saying quarterly revenue would be a full 16% lower than the company had previously guided to. The news was fairly shocking; after all, rivals AMD (NYSE: AMD) and Intel (Nasdaq: INTC) both posted strong quarterly earnings in recent weeks. How quickly the once-king of graphics cards has fallen.

Cheap graphics cards, bad news
However, some signs from AMD's earnings pointed to coming problems for NVIDIA. AMD's quarter was successful largely thanks to consumer demand, especially in notebooks. While surging notebook demand led to an 8% sequential revenue rise in AMD's graphics segment, operating profits fell from $47 million to $33 million in the recent quarter. Simply put, consumers shifted to cheaper graphics cards. NVIDIA confirmed this when they said "The increased solution cost of discrete GPUs led to a greater-than-expected shift to lower-priced GPUs and PCs with integrated graphics."

Remember, NVIDIA has largely ceded lower end GPU price points to AMD, instead choosing to focus its efforts on enthusiast-class chips that come with hefty price tags and margins. Only recently did NVIDIA introduce its new Fermi architecture to the pricing "sweet spot" at $200. So this change of consumers downshifting graphics cards is a real threat to the company. John Peddie Research estimates AMD's share of graphics cards increased to 24.4% at the end of the second quarter from 18.4% last year. During that time frame, NVIDIA saw a nauseating collapse to 19.7% from 29.2% last year.

The cash cow ... slipping away
Also, the warning once again illustrates how much of a play NVIDIA is becoming on its high-performance computing division. The segment generates fantastic margins, and after a steep fall off during the recession is back near all-time highs in revenue. However, even in this key segment, the increasing competitiveness of AMD is on full display.

Operating profit before tax in the segment was an impressive 39% last quarter; however, that's contrasted against the 54.2% margin NVIDIA saw back in early 2008 when the segment was hitting record sales levels. AMD's traditionally been the laggard in this segment, with NVIDIA claiming up to 90% market share in recent years, but they're now more competitive than ever.

Crunch time
In the face of all this bad news, I'm left to wonder if NVIDIA has let its core focus slip away too much. Upon looking at the company's financial statements, a colleague remarked to me that their R&D has soared 40% over the past two years while sales have decreased over 10%. The key reason behind this is that the company focused on their mobile Tegra processor. Executives had dollar signs in their eyes looking at the giant total addressable market, but competitors Qualcomm (Nasdaq: QCOM) and Texas Instruments (NYSE: TXN) are mopping the floor with NVIDIA.

A big part of the reason as I see it: Smartphone makers would rather see communication features like baseband processors, Wi-Fi, and Bluetooth integrated with the processor. NVIDIA's solution has always focused on the multimedia gains its Tegra chip offers, but that's not the sales pitch smartphone companies want.

Maybe NVIDIA's multimedia sales pitch would go over better in tablets. However, with Apple's (Nasdaq: AAPL) iPad being the king of the tablet mountain, there's not much of a market for NVIDIA to sell to. The investment has been huge, but I'm wondering if it's time for NVIDIA to get realistic about its Tegra ambitions, kill the line, and retrench around its consumer graphics and high-performance computing before AMD can make further inroads.

So what do you say, Fools, should NVIDIA end this Tegra distraction? The comments box is below awaiting your thoughts.

Fool contributor Eric Bleeker owns shares of NVIDIA and would love to buy some Qualcomm once the Foolish disclosure policy allows it. Intel is a Motley Fool Inside Value selection. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. The Fool owns shares of Qualcomm and owns shares of and has written puts on Intel. The Fool owns shares of Intel. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.