Nvidia executives had a motto that they went to early and often following the company's fiscal third quarter results: A tablet is better than a cheap PC. You can debate the merits of that argument, but the reality is that Nvidia's Tegra chip may not benefit regardless.
The fiscal third quarter report from Nvidia was strong. The fourth quarter outlook left a bit to be desired. What happened? Nvidia's Tegra chips, which compete with Qualcomm's Snapdragon platform, went to OEMs as they built out tablets. Those builds are done. Now Nvidia needs sales to pull through more demand for its Tegra processors.
But there's a problem: Nvidia doesn't have Apple's iPad franchise in the fold. Executives talked up Google Nexus 7 sales, but that demand may not last. And then Nvidia has the Microsoft Surface, another device that's an unknown in terms of demand. Amazon doesn't use Nvidia's Tegra processors for its Kindle Fire HD.
In other words, Nvidia may not benefit from the tablet explosion as much as it would like. Jen-Hsun Huang, CEO of Nvidia said:
Our view of the PC TAM is that it is being eaten by tablets, and the reason for that is because a great tablet is surely better than a cheap PC. These days, the tablets are so versatile, and many of them are transformable and have hybrid tablet as well as notebook-usage models. And, now with the Surface -- Microsoft Surface and Win RT, the distinction between a PC -- a cheap PC and a great tablet is all but disappeared.
We, for all of the good fortune and good decisions, have found ourselves in a pretty great place in mobile computing. And, I think that we have, now, an opportunity to integrate our 4G modem and expand deeper into the smartphone market, continue to execute our road map, and because of the enormous implications of Win RT, give us the opportunity to grow into the PC marketplace. The future of cheap PCs is really tablets, great tablets. There will likely be Win RT tablets. They could be -- they may very well be Android tablets. I could even imagine them being Chrome tablets.
These are -- and, these tablets have keyboards, of course, so they're sometimes touch tablets, sometimes they're a notebook. But, I think we all recognize, now, that this is likely the future of the computer industry. I think we find ourselves in a really exciting time. Win RT just went to market. I'm really excited about it. We're seeing people using it all over. And next year, I think we're going to see even more, so this is pretty exciting stuff.
Exciting for sure. But analysts aren't sure Tegra will be the big dog---especially without an integrated LTE processor yet.
Evercore analyst Patrick Wang said Tegra wasn't paying dividends for Nvidia.
Looking ahead, our updated view: (1) A crowded tablet market simply isn't good for Tegra and it's fair to assume the iPad mini will change the original trajectory of Nexus 7. It's also early days on Surface but it lacks follow-through, contributing to a QoQ decline for Tegra. (2) Handset growth is on pause until Grey arrives, a mainstream Tegra AP with integrated LTE - expected to ramp in CY14.
JMP Securities analyst Alex Gauna added:
In our view, Nvidia has executed well and been rewarded with a noteworthy position in tablet apps processing for both Windows RT and Android systems; however, vertical integration threats from some key OEMs and uncertain Windows RT sell-through prospects remain key uncertainties that the quarter's solid results do not necessarily address.
As for the Nvidia's big argument. Tablets have a lot of runway, but all PCs are cheap. Huang's contention that tablets with keyboards with cheap PCs isn't proven yet---at least until hybrid tablet/ultrabook devices start selling. For now tablets sans keyboards trump cheap PCs. There are no guarantees that Nvidia's Tegra will be dominant.