Don’t Count NVIDIA Corporation (NVDA) Out in the Smartphone Wars

Chip maker NVIDIA Corporation (NASDAQ:NVDA) has had a tough time transitioning from being a graphics card specialist to being a major player in the mobile processor market. The company’s Tegra line of mobile processors has shown much promise, but sales have been underwhelming in the past two years.

NVIDIA has had particular trouble gaining traction in the smartphone market. The dominance of Apple Inc. (NASDAQ:AAPL) and Samsung (each of which designs application processors in-house) has limited NVIDIA’s addressable market. The recent trend toward integrated application/baseband processors, an area where QUALCOMM, Inc. (NASDAQ:QCOM) has a huge head start, has presented another roadblock for the company.

Nevertheless, NVIDIA has the technology necessary to become a major provider of mobile processors for the smartphone market. Moreover, CEO Jen-Hsun Huang appears committed to transforming NVIDIA into a mobile processor leader. The company is expected to bring its first integrated application/baseband processor (code-named “Grey”) to market later this year. All in all, it is too early to count NVIDIA out in the smartphone wars.

The rise and fall of Tegra
NVIDIA’s stock was severely battered during the recession in 2008-2009, and came under pressure again as the 2010 release of Apple’s iPad created the specter of PC death. Many investors hoped that NVIDIA’s Tegra 2 processor would be the company’s savior, and the hype surrounding that product launch briefly drove the stock back over $25 in early 2011. Since then, as NVIDIA has had trouble making the Tegra business profitable, the stock has lost half its value (see chart below).

NVIDIA stock price. Data by YCharts.

NVIDIA scored its biggest Tegra design win to date with Google Inc (NASDAQ:GOOG)‘s Nexus 7 $199 tablet. While formal sales numbers have not been announced, the sales pace had ramped to about 1 million units per month by last fall. Unfortunately, other high-profile Tegra design wins like Motorola’s Xoom tablet and Atrix smartphone, as well as the Microsoft Corporation (NASDAQ:MSFT) Surface RT, have sold poorly in the marketplace.

Overall, NVIDIA’s performance in the tablet market has been satisfactory, and has been primarily held back by the failure of Android and Windows RT devices to break the iPad’s dominance. However, the smartphone market is much larger, even if Apple and Samsung are excluded. Unfortunately, NVIDIA has always seemed to be a step behind market-leader Qualcomm in smartphones.

Integration: key to the smartphone market
During the past two years, the integration of the application processor and baseband processor on a single chip has become increasingly common (and important). Qualcomm has been the leader in this shift, and has emphasized the cost and power efficiency benefits of integrated processors, particularly for LTE-equipped phones. Integration tends to improve power management, which is essential for achieving acceptable battery life for heavily used smartphones.