By Ian Sherr - Analysis
SAN FRANCISCO (Reuters) - Nvidia Corp’s decision to indefinitely postpone investment in chipsets for Intel Corp’s next-generation processors signals a shift in focus to fast-growing mobile devices that could see the company exiting the PC chipset market.
Led by Taiwan-born Chief Executive Jen-Hsun Huang, executives at the company that spends up to $1 billion annually on research have been talking up its Tegra mobile chip platform -- which manages power, memory and graphics for devices such as Microsoft Corp’s Zune media player.
Despite expectations of rapid growth in mobile Internet devices, analysts warn that margins could be pressured as Tegra goes up against Texas Instruments Inc and Qualcomm Inc.
Nvidia, which made its mark producing specialized graphics cards for video games, also makes chipsets -- collections of chips on a board that connect a microprocessing brain to other parts of a computer. The company controls 18 percent of that market compared with Intel’s 70 percent, according to IDC.
Although chipset revenue is growing rapidly and margins remain respectable -- estimated to be around the mid-30s -- the company is embroiled in a lawsuit with Intel, which could leave Nvidia without access to crucial technologies necessary for selling chipsets.
“They realized they were running out of runway because of the licensing issue with Intel,” said Wedbush Morgan Securities analyst Patrick Wang.
Intel says its tech-licensing agreement with Nvidia does not cover future microprocessors.
Nvidia, the No. 2 PC chipset maker, gets 25 percent to 30 percent of its revenue from that market, according to IDC. Its chipsets pulled in $241 million in revenue during the second quarter.
But chipset makers such as Asustek and VIA have seen market share erode as Intel leveraged proprietary technologies.
Advanced Micro Devices Inc announced in September that it will make its own server chipsets instead of relying on Nvidia and Broadcom Corp. Coupled with the specter of an uncertain outcome in a lawsuit, analysts say Nvidia has to plan for an alternative future.
Apart from cutting off investment, affected chipset design teams will be reassigned to the Tegra platform, Nvidia said.
“The signs are there about the changes in the market landscape and the competitive landscape,” said IDC analyst Shane Rau. “Is it writing on the wall? Is it a signal of what is to come? Quite possibly it is.”
Nvidia’s revenue trends have roughly mirrored the PC chipset market, which saw a dramatic drop in revenues to both enterprise and consumer markets as the recession deepened.
But chipsets have shown signs of recovery, with a nearly 19 percent sequential increase in revenue in the second quarter, according to IDC. The second quarter was especially strong for Nvidia, whose chipset revenues grew more than 60 percent sequentially and 38 percent compared with a year earlier.
Nvidia’s stock has risen 74 percent since the start of the year -- twice the Nasdaq’s 36 percent gain -- as investors bet a broad chip sector recovery benefited the company. Eight of 26 analysts polled by Thomson Reuters I/B/E/S still rate the stock a buy, with about 15 recommending “hold.”
Looking forward, Nvidia will still sell chipsets. Its latest -- and perhaps last -- iteration of its Intel-compatible Ion notebook platform is due for release soon.
But analyst say the company seems to be betting the chipset business will be less important in the long run.
Huang told analysts in June he thinks the Tegra could represent up to half of the company’s revenue in a few years.
It also offers better margins. Wedbush Morgan’s Wang said that, while margins for its chipsets hit the mid-30 percentile range, Nvidia is targeting margins for the new mobile handset platform north of 50 percent -- although the company has only sold a couple million dollars’ worth of the product.
“They’ve cited an expectation of at least $200 million in revenues from Tegra next year,” said Wang, adding that Nvidia management has said it expects a run-rate of $125 million in next year’s fourth quarter. “From 2 to 125 in six quarters is an aggressive number, but management there seems confident.”
Part of the reason for Nvidia’s confidence is its mantra of graphics, graphics, graphics. Whereas most competing companies have processors built on similar technologies, Nvidia offers something different, said Auriga analyst Dan Berenbaum.
“There’s a real differentiating factor there -- you’ve got the graphics,” he said.
Some analysts say it is too soon to judge whether Tegra will be successful. Others say it could make up for lost revenue if Nvidia discontinues its chipset business.
“Even if they are putting their (chipset) development on hold, it still means they could have a good profitable business in chipsets for 1 to 2 years to come,” Rau added.
“And by then, maybe no one will care.”
Reporting by Ian Sherr; editing by Edwin Chan and Andre Grenon