Nvidia (NVDA) is the company that pioneered the development of the GPU, a class of chips dedicated to graphics processing and found at the heart of all displays cards. Nvidia’s stock took a dramatic dive right after its recent earnings call that revealed 3 major problems. Firstly, some of its laptop display cards are failing due to a weak die, and the company took a $150-200 million charge to earnings to replace the cards. Secondly, it has been forced by competition to cut prices on some of its display cards. Finally, it missed a development deadline, and will not be able to deliver its next generation GPUs on time.
While the manufacturing defects are probably a one-time issue (one hopes), the margin pressure and the development deadline miss suggest that in the near-term, revenue will be flat or declining; the important question is, will these setbacks permanently impair profitability, or are these transient problems? In this article, I will examine the competitive landscape of the GPU industry, and try to outline the challenges NVDA faces in the mid- to long-term.
Nvidia is generally considered the technological leader in the GPU industry, and it is known for going after the high end of the market, especially the gamers. Nvidia works closely with game developers to ensure that their chips will be the most advanced and capable of supporting the latest games. Nvidia’s chips are found in GeForce display cards for PC desktops and laptops, the Macintosh display cards for Mac Pro desktops and the MacBook Pro laptops, and in Playstation 3.
Competition comes mainly from ATI (now acquired by AMD), and Intel. If you consider all display chips (including integrated chipsets), then Intel has about a 40% market share (mostly in low to mid-range integrated chipsets), ATI/AMD has a 20% market share (at all price points), and Nvidia has a 30% share (at all price points, but skewed towards high-end market), with the rest of the market filled by minor low-end chipset manufacturers.
ATI is the most direct competitor for Nvidia with its Radeon display cards. In the midst of a difficult merger with AMD, ATI nonetheless managed to surprise Nvidia with a novel technological strategy. While Nvidia has followed the classic Intel strategy of producing one powerful chip for its top-line display cards, and then gradually moving that chip down the value chain, ATI followed a new strategy of producing mid-range chips, and then bundling a few of them up for its top-line cards. This strategy requires some nifty engineering with regards to inter-processor communications, but if feasible could cut power consumption dramatically. It remains to be seen whether this strategy will scale well in the future, but at least in the here and now, ATI’s Radeon cards using this technology has forced Nvidia to cut the prices on some of its mid-to-high range GeForce cards.
And then there is the ever-present competition from AMD and Intel at the lower end of the market. Intel is increasingly pushing platform solutions as a way to include more of its chips in a product, a strategy used to great effect in its Centrino line of wireless cards. While Intel is already a large player for low-end integrated graphics chipsets, it also has the “Larrabee” project, which nominally aims to produce an advanced GPU to compete head-to-head with Nvidia. However, the design specs for Larrabee uses an x86 instruction rather than the typical graphics-specialized instruction set that both Nvidia and ATI chips use. This suggests that Larrabee will be more suitable for general graphics tasks rather than the speed-sensitive high-end tasks like DVD playback or gaming.
On its part, AMD has its “Fusion” project, which aims to put CPU, GPU and memory controller on the same die. This strategy will increase communication speed between the CPU and the GPU and will reduce power consumption, but squeezing so many components onto one piece of silicon will limit the number of transistors in each component. Accordingly, AMD’s first Fusion processor product, code-name Shrike, will be meant for smaller mobile computers and sub-notebooks. These products are unlikely to directly challenge Nvidia’s high end products, but may squeeze its profit in lower-end markets.
Then there is the universally hated extortionist of the industry, Rambus, which has just sued Nvidia for patent infringement. Rambus purportedly designs memory products, but never implements those designs in practice, and makes a living by suing other chip companies for patent infringements. Nvidia is just the latest in a long line of chip companies that it has sued, arguing that it deserves licensing fees when other companies include SDRAM in their products (as Nvidia does in its GeForce cards).
The legal case is complicated and turns on obscure points of technology, and the licensing fees that are potentially due are difficult to estimate since Rambus’s patents only cover a small portion of the SDRAM specifications. Nonetheless, it is not in Rambus’s own interest to demand fees that would make it uneconomical for a company to make its product, or severely compromise the competitive position of a company, and the impact on Nvidia will probably be minor.
In the next article, I will look at Nvidia’s long-term prospects, and attempt a valuation.
Disclosure: Author is long NVDA
This article has 9 comments:
a) The legal case against nVidia is pretty simple; Nvidia has been on notice since year 2000 of their infringement of multiple enforceable and valid patents belonging to Rambus thus nVidia is liable for willful infringement which post verdict could mean treble damages… nVidia in this respect is facing an extremely dangerous suit.
b) The Rambus claims of infringement are all but obscure, nVidia was riding the tail of the DRAM cartel thinking that Rambus will be destroyed but unfortunately for nVidia a Jury in a federal court has ruled that ALL JEDEC compliant DRAM's, SDRAM, DDR1 and beyond are in fact infringing on multiple Rambus patents relating to DRAM's AND DRAM controllers!!
c) The royalty rates are all but difficult to estimate; In the past Rambus has asked for and received through amicable negotiations a 5% royalty for DRAM controllers so a template of a reasonable royalty that the market can bare already exists, add in the willful infringement trebling and you get a potentially disastrous future…(AMD/ATI have already secured a comfortable settlement)
d) Rambus is a pure IP NPE which is engaged with in house R&D and tech support/consultancy out sourcing. When a corporate entity like nVidia opts to incorporate Rambus's IP in their products with out Rambus's authorization (infringement) Rambus has the constitutional right to sue that infringing entity and exclude it from the continued use of its IP. The notion that it is not in Rambus's best interest to sue nVidia is absurd as Rambus's legitimate business model requires it to seek royalties for their patented innovations in order to enhance the company's value and finance their ongoing R&D efforts. Rambus will seek relief from the courts as long as infringing thieves will refuse to pay for the use of Rambus's Intellectual PROPERTY!
e) The impact on nVidia if they lose this suit will be all but minor, both in absolute terms ($ out of pocket) and in relative terms vis a vis their licensed competition (AMD/ATI & Intel)
As for your initial derogative comments, Rambus is "universally" hated by habitual infringing thieves, some of which were convicted in blatant, criminal anti trust felonies; nVidia is nothing more then a thief when they infringe on Rambus's IP.
Rambus makes its living from patent royalties. Over the years dozens of companies from around the world have acknowledged the value of Rambus's intellectual property and licensed it for reasonable royalties. Some companies including nVidia have decided they prefer to use Rambus's IP but not pay for it like all the other law abiding companies. When a thief refuses to pay for using your property you have no choice but to seek relief from the courts or you might face the risk of losing what is owed to you from the thieves and possibly losing your rightful income also from your initial licensees that might become displeased by the non payment of the thieves.
Rambus has proven in court that they hold multiple, enforceable, valid and infringed patents that were incorporated in all JEDEC compliant DRAMS from SDRAM, DDR and beyond. The only thing they want is to be rightfully compensated for the use of their patented IP.
If I was you I would seriously reevaluate a long position in NVDA, they are transforming into a real dog of an investment.
Disclosure: Author is a law abiding RMBS long
it is very important to give an unbiased view on the perspective of things, when nvidia releases a new chip that beats the competition you guys are quick to give detailed description and salute them. So why not give AMD/ATI the same respect, don't they deserve it ?
facts :
1.the New range of ATI support dx10.1, nvidia doesnt.
2.the whole 2 last ranges of ATI cards support HDMI, half the nvidia cards don't.
3. ATI cards cost half the price yet have very comparable benchmarks.
4. ( and this one is very important !!!! ) Nvidia has discontinued full screen video mirror feature for windows vista, yet it works flawless with ATI cards.
5. ATI cards use less power and 4850's are single slotted so you don't waste valueble space.
6. ATI is using 55nm and DDR 5 memory.
I think it should be important to point these out, it is not every day that a company can rival the ring leader and litteraly bring them to their knees after such a long battle as the one AMD / ATI has endured. Your article i think is just badly written, you give us the bad news of nvidia, yet you still make them sound like heroes when all theyv'e done for the last year was over price eveything they released.
Hope it helps the fellow investors out there:
www.greenfaucet.com/tr...
don't forget the 'theoretical' off-b/s contingent obligation they have to pay up for an x86 license in order to compete in the entire 'platform' play. they will have to pay out serious $$$ to buy up Via Technologies if they want to live in a world with direct competition vs. Intel.
A serious analysis of their profitability by product segment and total addressable market overtime would show that they have a permanent impairment to their margins and operating income over time. It's inevitable... unless you flatly assume that Intel and their Larrabee strategy is a total failure? I think not...