In a corresponding article published today (you can read it here), I explored the disconnect that's developed over the past few months between the widely watched Philadelphia Semiconductor Index and various mobile markets. A few mobile-focused areas, such as radio-frequency companies, are struggling, but no area looks as deflated as tablets do right now.

The following chart shows a comparison of the Philadelphia index to both a host of RF companies, and also NVIDIA (Nasdaq: NVDA), a company that has emerged as the early leader providing tablet processors.  


As you can see, NVIDIA's pulling along at the bottom of the group, having fallen by about 32% since Feb. 18 before rebounding in the past week.

Becoming a tablet powerhouse
Although trying to precisely read Mr. Market's mind is an exercise in futility, there's little doubt that a glut of lackluster tablet news is weighing down NVIDIA's share price. The company, which has long been known for its expertise in graphics cards, made a strategic shift to mobile processors in 2008. NVIDIA struggled to break into the smartphone market, but it struck gold in tablets. As companies have raced to produce their own tablets, NVIDIA has scored a series of design wins across a host of major manufacturers. Asus, Acer, Dell (Nasdaq: DELL), LG, Motorola Mobility (NYSE: MMI), and Samsung are all using NVIDIA's Tegra or have announced that they'll be using it in heavily promoted upcoming tablets.

A revolutionary opportunity … for some
The big problem is that tablets that don't have a giant apple emblazoned on their backs aren't selling. Well, they're selling, but not briskly enough. This state of events has been pressuring more than NVIDIA. At the turn of the year, the annual Consumer Electronics Show was a veritable Tabletpalooza; it seemed every manufacturer was turning to tablets in a big way.

That sparked quite a bit of hope for companies such as Motorola, Research In Motion (Nasdaq: RIMM), and HTC. If tablets were the next major growth opportunity, it could mean a fundamental restructuring of the landscape for computer manufacturers. Mobile companies have made occasional attempts to establish a foothold in the PC industry, but they've largely been unsuccessful -- see Nokia's ill-fated attempt at selling a netbook.

However, tablets share more in common with smartphones than they do with PCs, thanks to their inclusion of many of the same components that mobile companies already procure, as well as a very similar design. Not only that, but if tablets with 3G and 4G connections to wireless companies gained popularity, that would mean tablets would be sold at the same outlets (e.g., Verizon and Sprint) that companies such as Motorola and HTC already had an established presence in. If tablets could take even 25% of the PC share, it would be a potential coup for mobile companies and a body blow to existing PC vendors such as Acer, Dell, and Hewlett-Packard (NYSE: HPQ).

The downside
Of course, as with any much hyped game-changing technology, tablet expectations got ahead of themselves. After a strong showing at CES pushed it to new highs, Motorola Mobility's share price has fallen by 29% as its Xoom tablet was reported to have a rocky launch. Excitement around the company has fallen from giddiness to having an analyst outright questioning the company's "survivability" ahead of earnings last week. Ouch.

Partially, investors have had to reorient their expectations surrounding tablets. For one thing, Google's (Nasdaq: GOOG) Honeycomb version of Android that's optimized for tablets is still a work in progress. This is Google's first crack at adapting Android to the different needs of tablet users, and it's only natural that there'd be some kinks in first-generation Honeycomb tablets. Second, sales figures may not be as booming as initially expected. Even mighty Apple (Nasdaq: AAPL) missed on iPad sales expectations last quarter: It sold 4.7 million iPads, while Wall Street was expecting the company to move 6.3 million.

You call this a revolution?
I'm not overly concerned with Apple's sales figures. The company launched the iPad 2 at the end of the quarter, and I'll be more inclined to assess the iPad's strength next quarter, when consumers aren't waiting on a refreshed model and the supply constrains seen at the time of launch have abated.

As for Android, we saw Google stumble out of the gate in smartphones as well. It wasn't until the launch of the Droid phone that the platform really took off. It's much the same with tablets: It'll take some time to get going, and initial troubles are to be expected.

However, that's not necessarily a good thing for investors banking on tablets as a central growth driver for companies such as Motorola or HTC. As Android finds its tablet sea legs, Apple will continue building up a more powerful content ecosystem. More importantly, Apple's massive buying power -- which lowers its component costs -- has allowed it to price the iPad at a surprisingly aggressive point. At a $500 entry tablet price, Apple has managed to maintain respectable gross margins while competitors struggle to turn a profit. As frustration matching Apple's pricing mounts, it's a given that the massive ranks of "me-too" tablet manufacturers will thin out.

Final thoughts
The big thing to keep in mind is that for most of the companies I've mentioned here, tablets aren't revolutionary, at least not to the extent that smartphones were. For each set of companies, there are instead varying levels of impact on their business:

  • If you're an Apple investor, the growth of tablets is definitely a central theme to the company's ability to keep growing. Give the company a pass for last quarter's iPad sales, but watch them more closely in the current quarter's results.
  • If you're an investor in mobile-focused companies such as Research In Motion or Motorola, don't get too aggressive about baking tablet sales into future projections. For the foreseeable future, smartphones will drive these companies' growth. Think of tablets as a valuable "call option" that has little current value but could drive outsized returns if conditions change.
  • If you're invested in companies such as Hewlett-Packard or Dell, tracking cannibalization trends is important. If tablet sales stay lower and are largely incremental to PC purchases, they won't help the business, but the damage won't be as much as currently expected, either.
  • If you own NVIDIA, watching tablet sales is very important. Even if current-generation sales disappoint, we're in the early innings of a long game. More importantly, it appears that the company has positioned its next-generation Tegra chip in a good spot to dominate the next holiday refresh cycle of tablets. With a more-polished Honeycomb surely released by then and tablet manufacturers releasing a second wave of designs, the holiday season into early next year will give a much better picture of how large the overall tablet opportunity is.

If you want to keep following tablet development across the year, make sure to add any of the companies discussed her to our free My Watchlist service, which provides updates on all your favorite companies.