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NVIDIA Corporation (NVDA): Does It Deserve a Place in Your Portfolio?

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I’ve had my eye on NVIDIA Corporation (NASDAQ:NVDA) for a while now. As an old-school fan of PC games, I’ve used several NVIDIA graphics cards over the years, and as a follower of the fast-changing mobile landscape, I can appreciate the chipmaker’s efforts to diversify into the biggest new personal computing market since the market was created in the 1980s. However, I haven’t quite been able to step over the line and actually buy NVIDIA for my personal portfolio, as I’ve watched its stock lose an unexpectedly large amount of ground against the indexes for the last two years despite a stream of (generally) positive news:

NVDA Total Return Price Chart

NVDA Total Return Price data by YCharts.

What’s wrong with NVIDIA Corporation (NASDAQ:NVDA) today? Are its problems too great to justify investing in it, or is the company poised for a mobile turnaround on the strength of its latest Tegra processors? Let’s dig into some pro and con arguments to figure out whether NVIDIA should be part of my (or your) portfolio, or if it’s better watched from afar.

Pro: Tegra 4i looks to get a leg up on the competition
NVIDIA Corporation (NASDAQ:NVDA)’s latest smartphone chip, the Tegra 4i, is shaping up to be a watershed release for the company’s mobile efforts. It’s the first NVIDIA chip with an integrated wireless 3G/4G LTE modem, and just as importantly, it’s purportedly half the size of smartphone processor market leader QUALCOMM, Inc. (NASDAQ:QCOM)‘s competing Snapdragon 800. Small is beautiful when it comes to smartphone components, both in terms of the space premium for a device’s internal layout and in terms of its power consumption. NVIDIA Corporation (NASDAQ:NVDA) CEO Jen-Hsun Huang pointed out that “we’ll have some phone success this year, but we’re not expecting to have a whole lot of phone design wins until we engage the market with LTE.” Well, NVIDIA’s engaged the market now.

Con: NVIDIA is still far behind in mobile processors
The Tegra 4i is a big leap forward for NVIDIA Corporation (NASDAQ:NVDA), but it may not be enough to upend Qualcomm from its dominant position in smartphone processors. The Tegra 4i may be smaller than Qualcomm’s latest, but the new Snapdragons purportedly retain a power-consumption advantage. Qualcomm executives continue to boast of superior performance, which could be bluster, but may well not be — the market leader’s R&D spending over the past four quarters is nearly four times NVIDIA’s, and Qualcomm has every incentive to laser-focus itself on holding that lead.

In the most recently available quarter, Strategy Analytics showed Qualcomm far in the lead on smartphone applications processors with a 42% market share. Samsung comes in second with 27%, in large part because of a long-standing relationship with Apple Inc. (NASDAQ:AAPL). NVIDIA doesn’t even crack the top five, and its smartphone share has been “relatively flat” year over year.

Pro: NVIDIA leads in non-Apple tablets
There is one area where NVIDIA bests Qualcomm: Android tablets. Apple still controls nearly half of the total tablet market, but NVIDIA holds about 17% of the rest — good enough for a 36% market share in Android tablet processors, according to data compiled by my colleague Chris Neiger. Many projections anticipate continued Apple category dominance, with IDC expecting iOS tablets to command 44% of the market in 2017, compared to 46% for Android. However, IDC sees over 350 million tablets shipping worldwide that year, an 83% increase over 2013’s projections. That’s about 58 million tablets using NVIDIA’s chips, assuming no further market shifts. That’s pretty good growth, don’t you think?

Con: NVIDIA doesn’t actually hold a category lead anywhere
NVIDIA still trails Apple’s proprietary tablet chips by a large margin, and the competition for Android tabs is likely to heat up in the near future. Historically, NVIDIA has been most known for its PC graphics processors. However, the company doesn’t come close to leading that market when you look at the full range of products. The latest data from John Peddie Research indicate that Intel Corporation (NASDAQ:INTC) holds a commanding lead in “discrete GPUs,” which is any dedicated graphics chip on a PC:

Chipmaker Q4 2012 GPU Market Share Year-Ago Quarter Market Share Year-Over-Year Change
Intel 63.4% 59.2% 4.2%
AMD 19.7% 24.8% (5.1%)
NVIDIA 16.9% 15.7% 1.2%

Source: John Peddie Research.

AMD is clearly the big loser lately, but NVIDIA hasn’t been picking up share at the same pace as Intel, which means that not only is it failing to capture market share from the leader, but it’s effectively ceding ground. Granted, the overall PC market has been eroding in recent quarters — all three chip makers saw year-over-year shipment declines — but a leading position can provide a more stable base from which to branch out. Intel is working its way into mobile chips as well, and although it’s well behind NVIDIA right now, its resources are greater than both NVIDIA’s and Qualcomm’s combined.

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