NVIDIA (NASDAQ:NVDA) is best known for its graphics chips that go into PCs, and the company generates the vast majority of its revenue from these GPUs. NVIDIA's other segment, which consists of the mobile Tegra system-on-a chip, has had a volatile history, with revenue fluctuating wildly during the past few years.

Tegra was originally aimed at mainstream smartphones and tablets, and it had some success early on. In 2012, Tegra generated $764 million of revenue, growing by about 30% compared to 2011. In 2011, NVIDIA acquired Icera, a baseband processor company, in an effort to better compete in the mobile market. NVIDIA developed a version of Tegra, the Tegra 4i, that integrated an Icera baseband processor in 2013.

These efforts were ultimately for naught. Tegra had the advantage of superior graphics compared to competing mobile processors, but that didn't mean much in the mainstream smartphone market. NVIDIA eventually abandoned its original plan, refocusing the Tegra business on areas where it could gain a genuine advantage. The Icera business wound down during the second quarter of this year after a buyer couldn't be found.

During the second quarter, Tegra generated just $128 million of revenue, down nearly 20% year over year, and the segment posted an operating loss of $41 million. Sales to smartphone and tablet OEMs collapsed, falling by more than 80% year over year, while NVIDIA's own SHIELD devices and sales to automotive companies picked up some of the slack.

While the state of the Tegra business may look dire, NVIDIA is now mostly out of the competitive business of supplying processors to smartphone and tablet OEMs. Automotive has become the largest part of the Tegra business, and with automotive sales surging, growth and profitability in the Tegra business may not be too far off.

Tegra X

Source: NVIDIA.

Millions of cars powered by NVIDIA
During the second quarter, NVIDIA generated $71 million of revenue from its automotive business, a 76% year-over-year increase. NVIDIA's Tegra chips are mainly used today to power in-car displays, and according to the company's investor day presentation, 8 million cars currently on the road contain NVIDIA chips. Some of those cars contain more than one Tegra chip, with the Audi Q7 sporting as many as four in order to power all of its displays.

Twenty-five million additional cars containing NVIDIA Tegra chips are in the pipeline, but because the time-to-market for cars is typically measured in years, NVIDIA's automotive design wins take quite a bit of time to actually generate revenue. The silver lining is that it makes NVIDIA's automotive revenue more predictable, and it's safe to say that strong automotive growth is likely to continue.

The majority of NVIDIA's Tegra revenue now comes from the automotive business, and that percentage will likely grow over time. The other major source of Tegra revenue is NVIDIA's own SHIELD devices, but none of these products have been runaway hits. If automotive revenue continues to grow rapidly, within a year, the Tegra business will be at a point where automotive growth will more than offset the decline in sales to mobile device OEMs. The volatility of the Tegra business could be a thing of the past.

Tegra is still losing money, but losses are getting smaller, even as revenue declines. The Tegra segment reported an operating loss of $41 million on $128 million of revenue during the second quarter, down from a $55 million loss on $159 million of revenue during the same period last year.

It shouldn't be surprising that automotive Tegra sales carry higher margins than sales to mobile device OEMs, given both the competitiveness of the mobile processor market and the amount of software involved in NVIDIA's automotive Tegra-based platforms. Tegra has the potential to become a very profitable business for NVIDIA if it becomes large enough.

In the long run, NVIDIA is pushing Tegra not only to power in-car displays, but also to power driver assistance features, and eventually to be the brains behind autonomous cars. The potential is enormous, and Tegra could easily become a billion-dollar business for NVIDIA if everything goes according to plan.

Tegra will probably keep losing money for at least a couple more years as it grows; but with automotive becoming a larger part of the segment's revenue, the losses should continue to shrink going forward. There's now a clear path to profitability, and it doesn't depend on getting Tegra into mobile devices, where the graphics-heavy chips have no real advantage. Instead, NVIDIA's focus on the automotive market has given Tegra a bright future.

Timothy Green owns shares of Nvidia. The Motley Fool recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.