Graphics chipmaker Nvidia (Nasdaq: NVDA) could face increasing challenges in the coming days as two of its biggest rivals -- Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) -- are lining up their advanced graphic chips for the market.

Nvidia, which specializes in high-performance graphics cards favored by gamers, faces pressure as Intel plans to launch a chip that combines a traditional core processor with a graphics processor early next year.

Nvidia recently unveiled plans for a new chip that will be available in the second half of 2011. The graphics processor, known as Kepler, will deliver faster performance and be followed two years later by another generation called Maxwell, said Nvidia chief executive Jen-Hsun Huang at an event in San Jose, California.

The Kepler processor is said to be three to four times faster than Nvidia's current Fermi chip generation. Nvidia also announced that Tegra 3 will soon launch, and Tegra 4 is already in development.

But Intel and AMD are not standing still.

Intel is readying its next-generation processors, named Sandy Bridge, which are expected to possess more graphics capabilities, meaning buyers don't need to shell out extra dollars on the discrete graphics hardware offered by AMD and Nvidia.

Intel, which makes the microchip brains for 80% of the world's computers, would like to see its Sandy Bridge counted on to handle the mainstream graphics needs of computers built over the next few years. Sandy Bridge is expected to hit markets in the late fourth quarter and early 2011 and is aimed at consumers who want to use their laptops to edit and share high-quality photos, HD video, and play games.

Intel's integrated graphics chips have roughly a 60% share of total notebook and laptop PCs, while the other 40% of PCs use discrete graphics chips from Nvidia or AMD.

"If we assume Intel wins five of the 40 points of discrete share, then Nvidia's client graphics processing unit (GPU) business could be impacted by 12.5%, or by roughly $200 million in annual revenues and $0.13 in annual EPS contribution," FBR Capital analyst Craig Berger wrote in a note to clients.

"If Intel's integrated GPU performance very meaningfully improves, and the system-level architecture enhancements are robust, Nvidia and AMD could theoretically lose even more market share," Berger added.

AMD, meanwhile, plans to launch its Fusion family of accelerated processing units (APUs) in the first half of 2011. AMD's Fusion processors combine CPU, GPU, video processing, and other accelerator capabilities in a single-die design. One APU architecture family, Ontario, will target ultraportable laptops, while Bulldozer APUs will be designed for servers, workstations, and other high-performance computing systems.

In addition, AMD's earlier launch of its DX11 GPU product is driving market share gains for the company. In just three quarters, AMD has shipped more than 16 million Microsoft DirectX 11-capable GPUs.

Besides competition in its core market, Nvidia is also facing weaker PC demand. That has hurt the other chip makers as well; Intel issued a profit warning in August that its third-quarter revenue could fall short of its estimates by more than $1 billion. Beyond demand, however, there is a shift in the way many computing devices are built, partly as a response to the competition from the tablet market.

"We hear that notebook vendors are consciously de-featuring lower-end notebooks right now in response to the growing threat from tablets like the Apple iPad and the Samsung Galaxy Tab (fewer notebook PCs are using discrete GPUs), effectively shrinking the GPU market," Berger wrote.

To diversify, Nvidia is moving into the fast-growing mobile business, combining low-powered processors designed by ARM with its own graphics processors under the Tegra brand name for smartphones and tablets. HTC recently announced its tablet will use Tegra as will ViewSonic and LG.

For calendar-year 2011, Berger currently estimates 16.5 million units, $155 million in revenues, and $0.10 of EPS contribution from Tegra shipments.

"For 4Q 10, we think Nvidia could guide revenues to be flattish sequentially given some GPU risks, while likely benefitting from higher Tegra shipments," Berger said. In addition, yields from Taiwan Semiconductor's 40nm continue to improve and are likely to boost Nvidia's gross margins in the fourth quarter and first quarter.

Berger said he is also hearing some improving commentary about Nvidia's Tegra applications processor, with possible Tegra 2 wins at Acer, HTC, LG, and Motorola in their upcoming Android-based tablet that is expected to hit the market in the first half of 2011. 

"Upside to these estimates is possible if any of the Tegra 2-based devices are very popular with consumers, in which case our unit, revenue, and EPS contribution estimates could as much as double," Berger added.

Nevertheless, the market could witness a fierce competition to gain market share amid surging growth in smartphones and tablets.

International Business Times, The Global Business News Leader