After a brutal first nine months in 2010, NVIDIA (Nasdaq: NVDA) has rebounded sharply. The two charts below illustrate just how quickly the company's fortune has turned.

Fear and loathing in 2010

A rapid year-end rebound

Source: Yahoo! Finance. Baseline is starting price in 2010.

While NVIDIA's ascent in early 2011 was extremely rapid, the stock has pulled back in recent months thanks largely to fears about weak tablet sales. Is there still upside in the stock, or should investors be rightfully fearful that NVIDIA could suffer if Android tablets prove to be a bust?

Today we'll take a look at not only the key opportunities investors should be watching at NVIDIA, but also the key threats that could send the company's stock collapsing.

What to watch for: The good

  • While NVIDIA's mobile ambitions have hogged recent headlines, the company also sits in a valuable position in high performance computing that includes not only workstations running advanced 3-D models but also supercomputers. The company's Tesla line of cards is very efficient at handling very mathematical functions seen in advanced research, the oil and gas industry, and finance, but has been faced challenges gaining acceptance as its architecture is radically different from more familiar central processors. Thanks to its place not only in the world's most powerful supercomputer, but also in off-the-shelf systems from major OEMs such as IBM and Hewlett-Packard, Tesla is finally gaining mainstream acceptance.

Source: NVIDIA reports. Dollar figures in millions.

Combined with NVIDIA's popular Quadro line of graphics cards, the company could be looking at a high-margin high-performance computing division that's moving toward being a billion dollar per year business and is relatively insulated from declines in broader PC sales.  

  • NVIDIA's recently gained notoriety for multiple product wins with its Tegra mobile processor. The company dominated major product announcements at this year's Consumer Electronics Show. Its Tegra processor took home wins in multiple Motorola Mobility products, from its Xoom tablet to wins in its Droid Bionic and Atrix smartphones. The important aspect to note is that NVIDIA beat its competitors to the market by releasing the first dual-core processor, and appears to repeat the trick this holiday season. Its quad-core "Kal-El" design looks to be ahead of rival offerings from Qualcomm (Nasdaq: QCOM) and Texas Instruments (NYSE: TXN), which would give it an advantage when manufacturers look to announce splashy new tablets late next year. An interesting note came out today from Raymond James analyst Hans Mosesman that illustrates that even Apple (Nasdaq: AAPL), which produces its proprietary processor, is falling behind NVIDIA when it comes to designing space-effective processors maximized for svelte tablets and smartphones.
  • While the general PC market might be moving toward cheaper models that have less need for expensive graphics cards, NVIDIA gets its highest margin sales from "enthusiast" gamers who don't necessarily follow general PC trends. Not only that, but while Advanced Micro Devices (NYSE: AMD) still is an apt competitor to NVIDIA, Intel (Nasdaq: INTC) has backed off its plans to assault the discrete consumer graphics cards market as other threats like mobile have grown in importance.

What to watch for: The bad

  • While NVIDIA has proven successful at cracking the tablet market with Tegra, Qualcomm still dominates the market for Android and Windows Mobile processors. NVIDIA's bulkier quad-core update at the end of the year should help solidify its spot in tablets, but Qualcomm's SnapDragon still appeals to the majority of smartphone manufacturers. Under current dynamics, Tegra is constrained to a niche status in high-end smartphones and is dependent on an explosion of Android tablets to make its presence meaningfully felt on NVIDIA's bottom line.
  • NVIDIA has largely ceded the low-margin wrung of graphics cards as Intel and AMD both plan new offerings that integrate graphics processors with the central processors. However, what might be more troubling is AMD continually offering competitive high-end cards. The threat from AMD has cut into margins in NVIDIA's valuable high-performance segment. While AMD might not yet have a direct response to Tesla, its gained traction with cards that compete with Quadro, which provides the majority of NVIDIA's high-performance computing revenues.
  • Finally, investors need to watch carefully as NVIDIA rolls out plans for its ambitious "Project Denver," which will build custom ARM Holdings (Nasdaq: ARMH)-based processors that are integrated with graphics processors. While Project Denver should prove intriguing, especially in data center and supercomputer applications, it will also be a resource hog that will require large research and development expenditures that could whittle down the company's large cash hoard.

Final thoughts
NVIDIA might be sitting at the center of a coming tablet wave, but its future is also threatened by that very trend. Tablets cutting in to PC sales threaten the company's bread-and-butter graphics business. The best way to stay ahead of opportunities and threats facing NVIDA is to keep up with the news surrounding the company. The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies like NVIDIA, or any of its competitors. To get recent NVIDIA news and analysis, add the company to your watchlist today: