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Weak Sales Weigh on Nvidia and Tegra 4


What to expect from the chip maker after a second-quarter setback.

Nvidia's (NASDAQ:NVDA) Tegra 4 chip no longer looks like a growth driver for the company. Instead of benefiting from the enormous expansion of the mobile market, Tegra increasingly seems to be a technology facing hurdles. Jen-Hsun Huang, the company's CEO, expects that Tegra will be a drag on earnings, and with shares trading strongly above a $12-$13 range earlier this year, Nvidia could start to fall from here.

Mixed Quarterly Results

In the second quarter, the CEO said that Tegra revenue could be down from as little as $100 million to as much as $300 million. In the last quarter, sales for Tegra 3 dropped 49% from the previously reported quarter, and 71% compared to last year. Sales will not grow in the short term, because customers are shifting from Tegra 3 to Tegra 4. Huang also singled out one particular platform as a source of disappointment, without going so far as to name names. But it is highly likely that Nvidia was referring to Microsoft (NASDAQ:MSFT) and its Surface RT tablet.

Support for Surface RT 2

Nvidia is willing to stay the course with Microsoft's Surface, and will provide the chipset when Microsoft refreshes the tablet line. But by reducing its sales expectation for Tegra, Nvidia is also anticipating light sales for the Surface.

Microsoft should not be blamed entirely for weak Tegra 3 demand. Tegra also powers Google's (NASDAQ:GOOG) Nexus 7, but the performance of this device is sluggish. The refreshed Nexus 7, which is rolling out now, will replace the Tegra 3 chipset with one powered by Qualcomm (NASDAQ:QCOM). Google will be powering the new Nexus 7 with a Snapdragon S4 Pro SoC at 1.5 Ghz, compared to 1.2 GHz with the original Nexus. The graphics chip will be an Adreno 320 GPU.

Core PC Market

The PC market remains an important source of sales for Nvidia. The company is competing with Advanced Micro Devices (NYSE:AMD), but expects to experience strong demand for its high-end graphics chips across the desktop, workstation, and server markets. Nvidia's sales in graphics chips overall for desktop and notebook markets is also anticipated to grow in the current quarter.

AMD is up 54% in 2013, compared to 19% for Nvidia. AMD is pinning its growth on chips for the console market -- its latest iteration of system-on-chip (SOC) design, a dual core x86, uses even less energy than before.

Source: Zacks Investment Research

Nvidia Shares Could Get Stuck in a Rut

Weak sales for Tegra could limit any upside in Nvidia shares. At best, the stock could trade in a range between $14 - $15. Any sell-off below this might be limited, due to the support of sales growth in the PC market. The mobile Kepler GPU, which took the company three years to launch, should continue to support revenue growth. Looking to the long term, a lack of contract wins for Tegra could hurt Nvidia's share price regardless of the company's success in the PC market.

Editor's note: This story by Chris Lau originally appeared on Kapitall.

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