Are Nvidia's Chips Going Stale?

Nvidia (NVDA), a Bloomberg Businessweek 50 company, makes computer graphics chips and expansion cards that help gamers evade realistic zombies and aliens. That hasn't helped the company escape the fusillades of investors. Wall Street has reacted to a string of bad news—postponed product launches, a nasty lawsuit, a bad bet in mobile—by shooting down Nvidia's stock, which is off 44 percent this year, making it the worst performer in the Nasdaq 100.

The drop in the company's stock hasn't dented the confidence of Nvidia CEO Jen-Hsun Huang, who says his graphics chips are on the rise. In April the Taiwan-born founder of the company told analysts that the "vast majority of the world" recognizes Nvidia as a "world leader in visual computing." Such statements don't always help him in the eyes of investors, says Hans Mosesmann, an analyst at Raymond James.

Nvidia's main business is designing high-end computer chips that process the movie-like images in computer games. This year the Santa Clara (Calif.) company introduced Fermi, which promised game designers more processing power. "It's the most forward-looking architecture out there by far," says Dan Vivoli, Nvidia's senior vice-president for marketing. Forward-looking, but not on time: The $200, consumer-oriented version of the chip debuted only last week, six months later than originally planned.

Nvidia also makes components called chipsets, semiconductors that communicate with the computer's central processing unit—i.e., the brain. Intel (INTC), the largest seller of CPUs, stopped licensing Nvidia's chipsets in February 2009—a move that means Nvidia's chipsets won't work with future Intel CPUs, effectively locking it out of the market. Nvidia sued Intel for breach of contract in March 2009. "The Nvidia decision to exit the chipset business was their business decision, and we have no comment," says Intel spokesman Chuck Mulloy.

Regardless of the outcome of the Intel suit, growth will come not from chipsets, says Chris Caso, an analyst at Susquehanna International. Nvidia's future hinges on chips built for mobile phones and supercomputers—and the company has yet to prove it can successfully compete in those markets.

Nvidia's Tegra chip is a case in point. Nvidia designed the chip to function as the brain of smartphones and has touted it as a rival to Qualcomm's (QCOM) Snapdragon, used in HTC smartphones, and Texas Instruments' (TXN) OMAP, which powers Motorola (MOZT) Droids. To date, the only major products to use Tegra have been Microsoft's (MSFT) Zune music player and its Kin phone, which lasted just six weeks on the market before being discontinued.

Vivoli points out that an updated version of Tegra will appear later this year in phones running Google's (GOOG) Android operating system. Nvidia says it spent too much time fine-tuning Tegra chips so they work with Microsoft products.

Nvidia is also going after chips for supercomputers used in academic research and industries such as oil and gas exploration. It had a victory earlier this year when the Nebulae, a supercomputer in China powered by Nvidia's Tesla chip, was ranked the second-fastest machine in the world. Tesla has yet to make a significant impact on earnings, however.

Despite the string of bad news, Mosesmann sees brighter days ahead. "The new stuff that is out there is really, really good," he says, speaking of the company's new graphics cards. Although exact sales figures aren't available, graphics cards based on Nvidia's new Fermi chip are best-sellers on e-commerce sites popular with gamers such as TigerDirect and Newegg.

While Nvidia may once again be the top choice of the gaming crowd, investors want to see progress in the businesses Nvidia is pushing into, says Susquehanna's Caso. "At this point, because they've focused the Street on Tesla and Tegra, they need to deliver."

The bottom line: After a spell of product delays and bad bets, Nvidia is counting on the mobile and supercomputer markets for future growth.

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