Why Linus Gave Nvidia The Finger

| About: NVIDIA Corporation (NVDA)

The tech world is twittering today over Linus Torvalds' giving the middle finger salute to Nvidia (NASDAQ:NVDA), a maker of graphics chips.

Linus is a programmer. He's not an economic actor. What he did was impolitic. Given the fact that he's not an economic actor, however, the question is whether you should care.

The real story in the link above is a comment that sits below it, which basically explains what Torvalds is upset about:

nVidia drivers are provided, just they're closed source, behind on features, and responsible for many crashes on many systems. And we can do nothing about that as we can't see how they work -- they're just a binary blob.

Nvidia creates proprietary drivers in order to maintain proprietary advantage. When companies buy Nvidia chips and put them into their products, the company maintains a hold on the hardware after it's shipped.

For both Nvidia and the hardware makers this is not a bug. It's a feature. Maintaining control of the hardware means maintaining control over the customer and what they do with the hardware.

This has been a battle across the chip space ever since Linux, the open source version of Unix that Torvalds first released 20 years ago, gained a foothold in the market. In the communications space this problem has largely been cleared-up. It's more difficult to clear in the graphics space because proprietary content owners like the customer control proprietary chips deliver.

What NVDA shareholders should be concerned with is the company's market share. There the news is not good.

AMD (NYSE:AMD) has been gaining share while NVDA has been losing it. Even Intel (NASDAQ:INTC) has been gaining share.

This is starting to be reflected in share values. AMD has been hovering around breakeven this year, while NVDA is down 11%.

AMD, it should be noted, has been more cooperative with open source than NVDA. So the conclusion to investors should be obvious. Torvalds didn't raise his middle finger in frustration, he raised it because he could. And NVDA shareholders should take the warning seriously. Sales have been down, sequentially, for four quarters now. Net income is less than half what it was. The balance sheet remains strong but the company has a problem.

You might want to get out and get into something with fewer problems. Might I recommend a little Intel?

Disclosure: I am long INTC.

Additional disclosure: I have held INTC since the mid-1990s.