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Investors Should Not Miss NVIDIA and Qualcomm's Mobile Move

May 25, 2014 | About:

In the world of mobile processors NVIDIA (NASDAQ:NVDA) has struggled to make inroads in a market dominated by Qualcomm (NASDAQ:QCOM). The Tegra 3 was released at the end of 2011 and saw some success, most notably finding its way into Surface RT and the console of the Tesla Model S. The Tegra 4 was delayed to push the Tegra 4i, a version with a built-in LTE modem, and the first devices featuring the Tegra 4 are just starting to come to market now.

But it's the next version, Tegra 5, which will be make-or-break for NVIDIA. The Tegra 5 will feature the Kepler graphics core, the same core found in desktop GPUs, and will support GPU computing along with other advanced features. Set to be released in Q2 of 2014 the Tegra 5 will likely blow away the competition in regards to graphics performance.

The importance of games

PC gaming is growing even as the PC market as a whole is shrinking. New PC games often require fairly high-end graphics cards in order to play at high settings, and every year the envelope gets pushed further and further. You simply can't play many games at acceptable settings with integrated graphics or low-end cards, forcing serious gamers to spend hundreds of dollars to upgrade to an extremely powerful high-margin GPU.

Because PC games will always push the boundaries of what is possible discrete GPUs will continue to be in demand. But right now the mobile gaming world is different. Basically any game downloaded on an Android device can be played, regardless of the underlying hardware. The Tegra line may have more powerful graphics capabilities, but up until now that has offered no real advantage over the competition.

NVIDIA is trying to change that. The company launched its own handheld gaming device, Shield, at the end of July which features the new Tegra 4 processor. Shield is not only capable of playing Android games but also streaming PC games over a local network, allowing a gamer to play PC games on the handheld. At $300 I doubt that Shield will be a mass-market hit, but I don't think that this was ever the point. The real selling point for a Tegra-based device is the games, and we're just starting to see the beginning of a long-term strategy emerging.

A mobile dichotomy

The key to Tegra's success is games. Already there are a bunch of games optimized specifically for Tegra, and over time this list should grow. Shield is important for NVIDIA because it gets Tegra 4 devices in the hands of gamers, creating a user base which justifies creating games aimed at Tegra.

The more games which are created for Tegra the more likely manufacturers of mobile devices will choose Tegra over the competition, especially for high-end devices. Having a library of high-quality games which work best on Tegra gives NVIDIA an edge which the company needs to make progress in mobile. The mobile gaming market will become much like the PC gaming market, where you can play games on low-end hardware but the experience is far better on NVIDIA hardware.

NVIDIA needs to make sure it pulls far away from the competition in terms of graphics performance, and Tegra 5 will be pivotal. Shrinking the Kepler core down to mobile took the company years of development, but I believe that the massive performance increases will give NVIDIA an edge.

Tegra 5 will bring PS3-level graphics or better to tablets, an enormous improvement over today's mobile graphics. NVIDIA needs Tegra to become synonymous with mobile gaming and for enough Tegra-optimized games to be created to compel customers to buy a Tegra-based device. Tegra 4 is the first step, but Tegra 5 will be the real game changer.

Won't go quietly

Qualcomm, the mobile chip leader, won't go quietly in the mobile GPU battle. While Tegra 4 destroys all current-generation hardware when it comes to graphics Qualcomm's upcoming Snapdragon 800 is claimed by the company to offer even better graphics performance than the Tegra 4. This may very well be true, but Tegra 5 will be the real challenge for Qualcomm.

Qualcomm is likely to remain the overall leader, but I expect NVIDIA to carve out a piece of the high-end market by focusing on outstanding graphics. This will certainly hurt Qualcomm's margins, as the high-end is the most lucrative. Given that NVIDIA's sole focus is graphics and the company has two decades of experience I believe that the NVIDIA has a real advantage pushing mobile graphics forward.

The bottom line

This year is a transition year for NVIDIA when it comes to mobile, with Tegra 4 starting to show up in devices after the delay. With the expected release of Tegra 5 next year NVIDIA will boost the graphics capabilities of mobile devices well above where they are today, and NVIDIA has a real shot at becoming the leader in mobile GPUs much like it became the leader in PC GPUs. The key is games, and as more Tegra-optimized games are released NVIDIA's chances of success grows. There's certainly still a hard road ahead for the company as it attempts to pry market share away from Qualcomm, but NVIDIA is in prime position to bring about a mobile gaming revolution.

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