Nvidia (NVDA) has been introducing innovative products regularly, which has put the company among the best in the business. Recently, the company launched the Shield handheld gaming device earlier this year, which has one of the most exciting features of streaming games from a PC directly to the Shield. This allowed gamers to play their PC games as well as Android games on the device, differentiating the Shield from smartphones and tablets. Furthermore, the device has put Nvidia in the market with a gadget of its own. However, the pipeline does not stop there - the company is working on a number of new products, which I believe will have a big impact on the future of the company.
GRID: A game changer?
Shield was quite innovative on its own but Nvidia has now taken this technology a step further by launching a beta test of a service called GRID. It allows the Shield to stream PC games directly from an Nvidia data center over the Internet, thus removing the requirement of owning a gaming PC in order to play PC games.
The stock price for Nvidia fell as the company launched the product - investors were skeptical about the company venturing into an unknown territory and believed it should stick to its core business. However, the reviews for the product have been positive and keeping in mind the low development costs ($10 million) the company should be able to generate profits from Shield. The company is definitely entering a new segment, but its extensive experience in the gaming and hardware segment should allow it to compete well. With PC-quality games, Shield could completely change the handheld market.
The impact of GRID has also been negative on the stock price mainly due to investors being skeptical about the company getting out of its core business. However, there is potential available ($ billion market according to Nvidia) in the market for such services and we will have to wait and see how GRID beta does. The biggest risk can be the infrastructure - the cloud gaming segment is going to take substantial investment to build data centers and other infrastructure. Nonetheless, the company has early mover advantage and will likely reap benefits of its position in the gaming industry.
Advanced Micro Devices (AMD) is also trying to break into the cloud gaming market with its own line of graphics cards, the Sky Series, aimed at that purpose. AMD has partnered with other cloud gaming providers, such as CiiNow, but none of these services have reached any sort of widespread adoption.
Additionally, the handheld's December update brings the ability to stream 1080p, 60 fps PC games to your television using the device's console mode and a wired Ethernet connection. Previously the Shield could only stream PC games at 720p, and a number of big titles already officially support the feature - you can play new releases like Assassin's Creed IV: Black Flag and Battlefield 4, as well as slightly older titles like Bioshock Infinite and Borderlands 2, while Nvidia says that more officially supported games will be added weekly.
Other pieces of the puzzle
Logan, which would probably be called Tegra 5, is expected to come out in January next year. This one does not come with an integrated LTE modem. Just like Apple (AAPL), Nvidia makes a big fast chip with impressive Kepler based GPU, but it won't put an icera LTE solution inside the same chip. Icera i500 is Tegra 5 compatible and it has AT&T (T) certification but the manufacturers will have to choose two chips instead of one. It is expected to become compatible with other US and international LTE carriers like Verizon (VZ) and T-Mobile. However, Nvidia is likely going to be making bets on its Kepler based GPU, expected to be the fastest graphics core ever integrated in a mobile that will rock tablets and some phones around the world. The fact that Logan is likely to pack very powerful graphics sans on-die LTE makes it a bit more interesting for tablets than phones, which is exactly what we saw with the Tegra 4.
The war between Nvidia and AMD was lacking focus from Nvidia's side lately. Plus it was not really striving to get sponsorships from gaming companies. With AMD's Mantle on its way, Nvidia was looking a little stale in competitiveness. Now that it is launching GRID, everything changes. This is a new arena for Nvidia and it would be long before a competitor could jump in. Plus, with GRID in its hands, Nvidia would be taking business directly from Xbox One and PS4 as it has a lot more to offer. It is estimated that about 3.2 million people are waiting to buy gaming consoles as the market is dry after it all sold out. Once it proves itself, GRID can be a massive product for Nvidia. And let us not forget about the upcoming Logan, the fastest graphics core ever integrated. In my opinion, the long-term prospects of the company look strong, with GRID and Shield, it is definitely going to grow.
Finally, looking at the fundamentals, the stock is cheaper compared to the industry based on almost all the metrics - its P/E ratio is 19.5, compared to 21.6 for the industry and P/B and P/S ratios stand at 2.0 and 2.2, compared to industry averages of 2.7 and 2.6, respectively. Furthermore, the company's decision to increase dividends indicates that the cash flows will be solid despite investing cash in Shield and GRID. In fact, the decision to return $1 billion to shareholders in 2015 shows that the company expects the cash flows to be stronger.