NVIDIA (Nasdaq: NVDA) CEO Jen-Hsun Huang sure knows how to pick his friends.
As the graphics chip specialist reported good third-quarter earnings last night, Huang enthused about a plethora of new and upcoming consumer products with NVIDIA inside. Advanced Micro Devices (NYSE: AMD) may have stolen NVIDIA's place inside Apple (Nasdaq: AAPL) desktop computers, but the company struck back with a design win in the updated Macbook Air. "We haven't had a chance to try and build really magical computers, so that's great," Huang said.
The name-dropping continues
As Arthur C. Clarke spun peacefully in his grave at those words, Huang pressed on. On the topic of Tegra, NVIDIA's mobile system-on-a-chip processor, the CEO noted that design activity around the chip is rampant and should produce plenty of competition for the iPad in the coming quarters. But Tegra 2 has been available in volume for a couple of quarters already, so why is it taking so long to get product on store shelves? Quoth Huang:
The iPad is not your normal device waiting around for somebody to beat it, I mean, this is an extraordinary device. If you want to build something that is even more desirable to customers, you've got to build something great. You're not just going to put a phone operating system on a larger display and ship it, you're just not.
Andy Rubin [lead of Andoid development] and his guys are doing amazing work and we're putting all of our best on it and of course, many partners around the world are putting their best on it. We're going to make sure we build something absolutely, absolutely magical.
Yeah, that buzzing sound in the air came from Clarke's grave in Sri Lanka, but that's not important right now. You'll note that Huang turned around in a heartbeat from praising Apple as a partner to expressing his adoration for arch-rival Google (Nasdaq: GOOG) and its Android team under Rubin. While Huang didn't say it in so many words, he was talking about the upcoming Gingerbread release of Android and how necessary it is in order for the platform to pose a threat in the tablet market.
So Huang sees the stars aligning for his company in coming quarters. As for the third quarter of fiscal 2011, sales drifted down by a gentle 6% year-over-year to $844 million, while earnings fell a more drastic 21% to $0.15 per share. All told, the stock is back where it was a year ago and 55% above 52-week lows set in August, when the Tegra was nowhere to be seen and AMD was killing NVIDIA in the core graphics-chip market.
What's on the horizon?
If Huang is right about Gingerbread's importance and the market opportunity ahead of his Tegra chips, NVIDIA could pose a credible threat to leading mobile chip designers Qualcomm (Nasdaq: QCOM) and Texas Instruments (NYSE: TXN). NVIDIA's Tegra, TI's OMAP, and Qualcomm's Snapdragon chips are all based on technology licenses from ARM Holdings (Nasdaq: ARMH) and should compete for many of the same design contracts. Samsung also plays in the same sandbox with its Hummingbird chips, but tends to keep that platform in-house for products like the Galaxy S smartphone and Galaxy Tab tablet computer.
In my view, tablets could surely use NVIDIA's graphics expertise to power their beautifully wide expanses of LED or even OLED real estate. By many counts, the best graphics subsystem in the real-world mobile market today is Samsung's Hummingbird. However, NVIDIA is working its thoroughly modern (but difficult to manufacture) Fermi architecture into every corner of its computing graphics line and is already readying a third generation of Tegra processors. Raw processing power isn't everything in the mobile space -- graphics-crunching muscle can be just as important, along with other considerations like power consumption and cost.
It's a complicated blend of factors that lands one mobile chip or another inside consumer products, and only time will tell whether NVIDIA has worked itself into a winning position. That said, I'm willing to bet that NVIDIA will win enough contracts to make Tegra a meaningful contributor to the company's sales in fiscal year 2012, calendar year 2011.
Having made an "outperform" call on this stock is currently hurting my all-star CAPS rating, but you might have better luck starting from this lower price point -- and I'm in for the long haul. Have at it, dear Fool -- you can't win unless you play!
