NVIDIA Hit by a Double Whammy

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NVIDIA (NAS: NVDA) is in the soup. The latest earnings report tells us that the company's traditional business is losing steam, whereas its mobile chipset business, which is still at a nascent stage, has fallen flat on its face.

Now it's time to take a closer look at what is bothering NVIDIA and why it may continue to experience rough weather ahead.

GPU business going wrong...
NVIDIA's core business of manufacturing graphic chipsets for PCs is facing strong headwinds. The Thailand floods last year disrupted the supply chain of hard disk drives, hampering PC sales. In the just-concluded quarter, the company's revenue declined 11% sequentially, breaking a trend of consecutive growth seen over five quarters.

NVIDIA's problems continue to add up. The company's GPU division, which makes up for more than half of its revenue, is expected to face a difficult time in the coming quarters due to the aftereffects of the floods. The possibility of a rebound in this division also seems remote, as smaller computing devices such as tablets, smartphones, and Ultrabooks are gaining ground.

...and mobile computing in serious trouble
Last year, I told you how NVIDIA was trying to capitalize on consumers' growing preference for mobile computing platforms. It clinched impressive design wins, and the Tegra 2 chip was gathering momentum. But now, the company has floundered badly in this segment. And there are three distinct reasons for the drop in NVDIA's mobile computing business, which fell 42% sequentially:

  • NVIDIA had to find a way inside top-selling devices to succeed in the mobile computing space, and that's where it came up short. Their chips are found mostly on Android-enabled tablets which have yet to take off, unlike the iPad from Apple (NAS: AAPL) .
  • And, if that wasn't enough, the company committed a marketing blunder. NVDIA released the Tegra 2 processor early in 2010 and announced the Tegra 3 chip just when the earlier release was gaining traction. As a result, orders for Tegra 2 chips were held back as customers preferred waiting for the updated version.
  • The competition is doing its bit as well. NVIDIA now sees Samsung, an existing customer, as a threat to its business. The Korean company supplies chips to other manufacturers, notably Apple, and it's expected that Samsung will now use its own chips.

The Foolish takeaway
NVIDIA has withdrawn its full-year guidance as its struggles seem nowhere near the end. The acceptance of the Tegra 3 chips and turnaround in the PC market will define how the stock performs in the long run.

In such circumstances, it's prudent to keep a watch on NVIDIA and see when it can stage a comeback. We will help you do just that through our free Watchlist feature, where you can add the stock to your Watchlist.

Editor's note: A previous version of this article stated that's OMAP and's Snapdragon chips power the iPhone.  This is not the case.  The Motley Fool regrets the error.

At the time this article was published Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article.Motley Fool newsletter serviceshave recommended buying shares of NVIDIA.Motley Fool newsletter serviceshave recommended writing puts in NVIDIA. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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