Why You Should Sell Your Nvidia Shares

Sep. 3.13 | About: Nvidia Corporation (NVDA)

Nvidia (NASDAQ:NVDA) has been trying hard to profit from the smartphone market but the company's efforts have not been fruitful so far. The company that's famous for its graphics cards was one of the early movers into mobile with its Tegra chips in 2008, but fell behind its peers gradually. Its second-quarter results released last month don't speak highly of its mobile computing strategy either.

Poor performance

Nvidia reported a dip of 6.4% in revenue to $977 million from the year-ago quarter, just falling short of the consensus estimate of $980 million. Net income also shrunk as it reported an EPS of $0.23, indicating a drop of 15% from last year.

Revenue generated by Nvidia's gaming GPUs and GeForce increased 24% and 4%, respectively. The robust performance in the desktop and server market drove sales. However, the overall results were disappointing as the increase in sales of gaming GPUs and GeForce was not enough to compensate for the decline in the sales of Tegra processors. As expected, revenue generated by Tegra plunged 71% to $52.6 million.

The bad news doesn't end here as Nvidia expects sales of Tegra 3 processors to slump further due to lack of enthusiasm for Microsoft's Surface RT tablets.

What next

To tackle the decline in the PC market Nvidia unveiled Shield, a portable gaming console. The unique features of Shield are that it uses Nvidia's latest chip processor and that it has a built-in display to play high-definition games. Nvidia had expected Shield to do well, but things did not go according to plan.

Nvidia had to slash the price of the device to $299 from $349. This drop in the price would not have pleased shareholders, but further doubts started creeping in when Nvidia said that a mechanical issue needs to be resolved and consequently the company postponed the much-awaited launch of the gaming device.

The company has recently started shipments of Shield and the impact it has on Nvidia's sales is yet to be seen. But given that gaming devices are not Nvidia's primary business, Shield looks like just a sideshow. The company generates the majority of its revenue from mobile processors, workstation GPUs and server GPUs. To make up for the weak sales of Tegra, Nvidia has ramped up the production of a new and more advanced Tegra 4 processor.

However, Nvidia's focus on the impending launch of its cloud-based graphics card called GRID might act as a catalyst for the future. The revolutionary GRID will offer gamers numerous advantages over traditional console gaming systems like:

  • Platform-independent gaming: High quality and low-latency gaming on any PC, smartphone, tablet or television.
  • Simplicity: Access to a range of games, allowing the user to play or continue games from any device anywhere.
  • Hassle-free: No game discs, no installation, freedom from an intricate setup and no digital downloads.

Competing against Intel and Qualcomm

Nvidia competes against rivals like Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM).

Intel, the world's largest semiconductor maker, released its second-quarter results in July and they were decent as the company reported an increase of 2% in revenue. The PC market provides Intel with most of its sales and the recent slump in the PC market is the primary reason why Intel is struggling to increase its earnings.

To arrest the downfall, Intel is trying to get smartphone and tablet manufacturers to start using its processors. Intel doesn't expect the PC market to recover, so the success of the company depends on how well the new chips aimed at smartphones and tablets are received in the market.

In addition, Intel launched its Haswell processor recently that delivers a massive improvement in the battery life of devices without compromising performance. Haswell will power more than 50 hybrid laptop devices.

Qualcomm is the king in mobile. It reported excellent third-quarter results in July as revenue surged 35% to $6.2 billion, comfortably beating analysts' estimate of $6 billion. The company's EPS increased to $0.92, again beating the consensus estimate of $0.91. The solid demand for its mobile chipsets was the reason behind this robust performance.

Qualcomm commands 59% share of the cellular baseband market according to Strategy Analytics. The company has made its way into lucrative accounts such as Apple and Samsung, which is why it has a major lead over peers. Intel is ranked second in the baseband market but its share is just 12%. In comparison, Nvidia doesn't even feature in the top five baseband companies across the globe.

Qualcomm started integrating an LTE modem earlier on into its basebands and this helped it capture the major share of the market. In comparison, Nvidia is still preparing its Tegra 4i with an LTE modem and so it is no surprise that it hasn't been successful so far.

As for the future, Qualcomm looks better positioned because it has better prospects and solid clients. Qualcomm's Snapdragon processors have landed a spot in almost all major smartphones and the company is further planning to promote Snapdragon chips. It displaced Nvidia from the latest Nexus 7 tablet while Snapdragon again won against Tegra as it replaced it in HTC's flagship smartphone this time, the HTC One. So Qualcomm has been taking away Nvidia's business and until and unless Nvidia launches a mobile processor with an integrated LTE modem (the upcoming Tegra 4i), it cannot challenge Qualcomm.

Qualcomm's growth has outpaced Nvidia and this is evident from the chart below:

QCOM Revenue TTM Chart

QCOM Revenue TTM data by YCharts


Nvidia is facing stiff competition from Qualcomm and the company has been losing important clients such as Google and HTC. Graphics processors are no doubt its strength but until and unless Nvidia makes some solid moves in mobile computing, it might not be able to improve revenue in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.