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Nvidia's (NASDAQ:NVDA) "Project Shield" - sounds like something out of a Marvel super hero movie perhaps involving Nick Fury. What is "Project Shield?" What would lure Nvidia into the gaming hardware market? What are the risks and opportunities?

Project Shield

At first glance, the Android / PC gaming device outwardly appears to resemble an Xbox controller with a flip screen. However, on the inside the device boasts some impressive hardware: namely a Tegra 4 system on a chip.

(Tegra 3 vs. Tegra 4 -- Impressive Specs) - Source

Why Enter The Handheld Market?

Nvidia is apparently attempting to alter the Google (NASDAQ:GOOG) Android ecosystem. Currently, the Android market is dominated by rather simplistic games as most tablets are just a touch screen and they lack a controller.

If Nvidia can provide the hardware (Controller, Tegra 4, Networking) then developers can make complex games for Android - games that might require a Tegra 4. As games become more complex, they will need more GPU power and thus Nvidia can sell more Tegra 4 chips - at the same time opening up a potential new revenue stream via handheld system sales.


Competition

Some people have pointed out that Nvidia will have to compete against Nintendo (OTCPK:NTDOY) and Sony for the handheld market. While this is somewhat true, the fact is iOS and Android are eating Nintendo's and Sony's lunch. The evidence below is a bit dated but we can assume the situation is only getting worse as the computing power of tablets and smart phones is increasing. It might take some time for Nvidia to build up an ecosystem around Project Shield but Rome was not built in a day.

(click to enlarge)

PC Gaming Via Project Shield

Project Shield will have the capability to play PC games if you have an Nvidia graphics card in your PC (via Nvidia's GRID). The PC will calculate the graphics and wirelessly transmit it to the handheld console. The question at hand is whether PC gamers will want to spend the money to buy an Nvidia graphics card just so they can stream PC games to a small handheld screen as opposed to a 23-inch monitor.

The singular answer that we can entertain is that perhaps there is an audience that might want to engage in PC games on a big high definition television. Hooking up to a television can be a cumbersome process. Do we really want to lug our PC from the office to the living room just to hook up to the television?

(Project Shield connecting to all of your devices)

Yet if we can wirelessly watch movies, run android games, and play PC games (through Steam) this might have some appeal to PC gamers that already own high-end graphics cards. It also solves the problem of having to own a device to stream movies to your TV such as a Roku.

PCWorld.com reports:

Connected to Nvidia's Tegrazone Android gaming site, [Nvidia's CEO] Huang demonstrated some of the gaming features of the device. They included full-screen gaming on a television, multi-player gaming with a user on another of the portable devices, and the playing of a 4K video to a 4K TV. The 4K format is a new video format being pushed by TV makers that features four times conventional high-definition resolution.

Watch the video presentation here of Nvidia's CEO Mr. Huang playing with Project Shield. Mr. Huang also let slip the code name for a future endeavor called Project Thor. We have no idea what Project Thor is but we will keep an eye out for it.

What If It Fails?

So what… big deal if it fails. The cost to develop Project Shield is relatively low. The Android OS is free. Nvidia GRID has been out for quite some time. Tegra 4 has already been designed for the tablet and smartphone market. This is a great way for Nvidia to cut its teeth a little more on its GRID streaming game service. Simultaneously, it offers Nvidia the chance to try to alter the market and sell more Tegra 4 chips. Given Nvidia's cash position we expect and want Nvidia to take risks to grow the company.

Financials

Nvidia's stock is easy to love. Nvidia currently has $3.43 billion in cash and a mere $19.63 million in debt. Cash per share stands at $5.49 and at the current share price of $12.09 this puts Nvidia at 45.4% cash backing. This massive cash position offers an investor some serious cushion in case things go south.

We have read comments that having so much cash is a bad thing but it is a problem that we love to find in a company. Swimming in cash and success is always a good thing. It allows the company to pay dividends and hopefully eventually grow the dividends. Nvidia currently pays out a small 2.5% dividend. While not large it is a good start for the company. Quarterly revenue growth is a respectable 12.90% while quarterly earnings growth is 17.30%. Levered Free Cash Flow is 419.28 million which means the money is flowing into the company.

Conclusion

Project Shield is nothing for investors to worry about. It is a minor project that is low risk but high reward if it is successful. If it is a hit it might change the Android ecosystem and allow for new ways to game and help expand Nvidia's revenue streams. If it fails then maybe Nvidia can revisit it down the road. One thing that Nvidia might do is directly assist developers to optimize games that tap the power of Tegra 4. Google however, stands to win from this either way. As people make purchases from the Google Play store, Google collects a cut of the revenue.

We like Nvidia and consider it a buy given its strong GPU sales and the potential of Tegra 4. Project Shield is a wild card. If it is successful will largely depend on price.

Source: Nvidia: Changing The Way We Game On Android