It seems that somebody's interested in Nvidia (NVDA). While it is not clear who is interested and on what side of the trade the rumor spreaders are on, it is clear there's been an unusual amount of stock-moving rumors. The two major ones we've had so far include:
- Nvidia's Tegra 4 is struggling to achieve design wins (a rumor I debunked here)
- Google (GOOG) is dumping Nvidia for Qualcomm (QCOM) in the next generation of Nexus 7 (much more believable, but there were rumors to the contrary just weeks before...discussion here)
And now, just a few days before the earnings report, we have a third rumor that some next generation Google Chromebooks will be powered by Nvidia's Tegra 4. Let's dig in to this rumor and see what we can come up with, shall we?
The Rumor Is Based On Facts
While the first rumor came from Digitimes (which has a history of 50/50 hit or miss), and the second came from a perpetual Nvidia bear, this one is based on facts. In particular, a new build of the Chrome OS has shown up, referencing "T114 Dalmore" chip, which experts believe to be a code name for a Tegra 4 variant. This means that it is very likely that Google's Chrome OS now supports the Tegra 4.
Why is this significant for investors?
Chrome OS Is A Level Playing Field
While Nvidia's dreams to infiltrate the Microsoft (MSFT) Windows platform are likely to fizzle as Windows RT proves to be a flop, they are kept alive by the immense success in the Android tablet space, especially with devices such as the ASUS Transformer Prime.
(Image Courtesy of Anandtech)
The reason that the ARM (ARMH) products such as the Tegra 3/4 stand a chance in the Android space is that Intel's (INTC) products have no home-field advantage on Android as they do in Windows. Why would anyone want Windows RT when it is less compatible with legacy apps, drivers don't exist for many peripherals, and doesn't even support full Office? This does not preclude Intel as a threat here, but it is a much more tractable fight.
Chrome OS is the same. While the majority of the Chromebooks available today are powered by Intel silicon, other vendors such as Nvidia can make meaningful inroads with their ARM based products without suffering the software and peripheral support handicap that exists on Windows.
However, there's downside to this: it's a level playing field. This means that if Intel (or some other ARM vendor) builds a better/cheaper chip platform, then the competitive pressures will either hurt margins or outright kill a potential design win. However, given that Nvidia has had no issues becoming the top Android chip vendor, it stands to reason that its strong hardware (4x Cortex A15's + a solid graphics engine) coupled with the firm's best-in-class software developer support should help fuel success.
Is There A Real Market Opportunity?
As investors, we want sales growth, and we want profits. Getting a design win is nice, but it ultimately needs to translate into sales and EPS growth. So, what's the market opportunity?
According to Acer, 5-10% of its notebook sales in the US come from devices powered by Google's Chrome OS. Samsung's ultra-sleek Chromebook shown above manages to consistently top the best-sellers list on Amazon.com (AMZN), and it seems that leading IT provider CDW will be providing enterprise support for these Chrome OS devices. While I was previously dismissive of the threat to Microsoft's clamshell market share dominance from Chrome devices, I now take a "wait and see" view here with respect to market share gains against Windows 8 in the traditional notebook spaces.
However, it is clear that there is a market opportunity for Chromebooks, and if Nvidia can score a design win socket or two at a leading OEM, then this should be an unequivocally positive development. The next question, then, is what kind of competitive advantage can Nvidia offer against its peers?
Gaming As A Competitive Advantage
At some point, general purpose performance through a web-browser becomes "good enough" for awhile and these system-on-chip products become reduced to commodity status. The guys with the bigger fabs and the lower cost structure, in this scenario, take the cake. However, one advantage that Wall Street seems to be so incredibly dismissive of is the opportunity to make Chrome OS a legitimate gaming platform.
While Nvidia's Tegra 3 received a lot of flak for sporting an underpowered GPU relative to peers, it made up for it with its strong developer relations team and strong brand loyalty with the PC gaming community (Nvidia has a "Tegra Zone" app that helps gamers find/download interesting games). I believe that this advantage could be leveraged in potential Nvidia powered Chromebooks, especially as gaming capability and emphasis could be a very clear differentiator for the OEMs looking to pick a chip from a sea of vendors to power their Chromebooks.
While the potential loss of the Google Nexus 7 socket isn't great, it seems that Nvidia's management could be up to something bigger and bolder. It still remains to be seen how well Chromebooks will fare in the market in the long term, but if Nvidia is able to bring a real differentiator to the Chromebooks with its "Tegra" chip + software support, then this could be the next leg up in the ramp of Nvidia's Tegra journey.
Additional disclosure: I am short ARMH.