NVIDIA Corporation (NVDA): A Strategic Shift For This Tech Company

Sometimes a company needs to adapt to a changing market, and NVIDIA Corporation (NASDAQ:NVDA) has recently done just that. The graphics chip company, which traditionally has made its own chips, announced recently that it would begin to license its graphics technology to other companies. This is a dramatic change in the company’s business model and could result in significant streams of high-margin revenue.

Plagued by delays

NVIDIA Corporation (NASDAQ:NVDA) has faced some high-profile product delays recently. The Tegra 4, a mobile chip and successor to the Tegra 3, was delayed in order to speed up the release of the Tegra 4i, a version with an integrated 4G LTE modem. NVIDIA likely lost some design wins due to this delay, but the integrated LTE will allow the company to better compete against market leader QUALCOMM, Inc. (NASDAQ:QCOM).

In addition to the Tegra delay, the company’s foray into handheld gaming, NVIDIA Shield, was delayed by about a month to fix a mechanical issue. Shield features the Tegra 4 chip and will cost $299 when it’s released later this month. I doubt that Shield will be a roaring success, given that it runs Android and thus features many of the same games that can be played on smartphones. I think that Shield is meant to show off the graphical power of the Tegra 4, and in that sense it will likely succeed. But I don’t think that Shield will be a game changer.

A strategic shift

What will be a game changer, however, is NVIDIA Corporation (NASDAQ:NVDA)’s decision to begin licensing its technology. This comes as the Tegra line has faced intense competition from Qualcomm, and the fact that Apple Inc. (NASDAQ:AAPL) designs its own chips and Samsung is increasingly doing so as well doesn’t help. But Apple and Samsung license graphics technology from UK-based Imagination Technologies, and if NVIDIA can take some of that business it could be a boon for the company.

Qualcomm, the dominant mobile processor company, uses its own graphics technology. But the market for NVIDIA here is basically all non-Qualcomm chips. If Apple began to license NVIDIA graphics it could give the company’s iPad a big advantage over Android-based competitors. Likewise, if Samsung licensed from NVIDIA the company might be able to take away market share from Apple. The iPad and iPad Mini account for a large percentage of the U.S. tablet market, with the high-end further dominated by Apple. NVIDIA technology could be just the edge that Samsung needs.

NVIDIA may also license its LTE modem technology, which will launch with the Tegra 4i. This poses a big threat to Qualcomm, which dominates that market. In fiscal 2012 Qualcomm posted a net income margin of 32%, an astounding number. But with competing chip makers capable of licensing NVIDIA’s graphics and modem technology, Qualcomm may lose its ability to charge premium prices. I suspect that as the market gets more competitive the profits will shift from the chip makers to the companies which license the technology.

It should be noted that Apple’s MacBook Pro line of laptops use NVIDIA Corporation (NASDAQ:NVDA) chips. Apple chooses the best components for its premium products, and this relationship could translate into a deal to put NVIDIA technology into the iPad. Although this is far from a certainty, it is a real possibility.