Semiconductors

Return to Article

Nvidia Targets Wider Role for New Chip

Alexei Oreskovic

SAN FRANCISCO -- Seeking to extend its reign in its core market, Nvidia(NVDA - Cramer's Take - Stockpickr) unveiled its latest graphics engine Monday.

The new chip, which features 240 processor cores and double the number of transistors from the previous generation, continues Nvidia's tradition of delivering the so-called bleeding-edge graphic processing muscle treasured by video game enthusiasts, while also positioning Nvidia to extend its significance beyond the province of games and into computing.

It's a bold bet by Nvidia. But it also underscores the multiple threats facing the company which could eat into its business.

"Nvidia is really faced with a slightly different set of constraints" than Advanced Micro Devices'(AMD - Cramer's Take - Stockpickr) ATI unit, the industry's other large graphics chipmaker, explains David Kanter, an analyst at Real World Technologies.

Microprocessor makers Intel(INTC - Cramer's Take - Stockpickr) and AMD have both put the graphics processing business in their crosshairs. Nvidia's new GTX 200 processor, which the company is billing as two chips in one, is Nvidia's attempt to fight a two-front war.

Nvidia shares are down roughly 41% since December, trading recently at $21.25.

While the battle against Intel and AMD will unfold in the years ahead, Nvidia will face a much more competitive ATI in the near term.

ATI's graphics chips have been a nonfactor in recent years, perhaps owing to the distractions of the company's merger with AMD. That, however, is expected to change when ATI releases its own new family of graphics processors, the first of which will ship later this month.

ATI has not designed its chips for the ultra-high end of the market, but instead for the mainstream band of the market, where prices are lower and ATI believes the bigger sales opportunity lies.

Kelt Reeves, president of Falcon Northwest, a maker of high-end PCs designed for video-game playing, has been experimenting with some of the new chips from each company and says ATI's latest is a vast improvement.

"It doesn't look like ATI is going to be anywhere near striking Nvidia at the high end," Reeves says. "But it looks like they might be back in the game in the low-to-mid-range. From what I've seen on this initial card, it looks like ATI might be competitive."

This increased competitiveness in the mainstream slice of the market could translate to ATI gaining 5% to 10% of the market for desktop PC graphics cards, reckons Stifel Nicolaus analyst Blake Fischer.

There's also concern on Wall Street that Nvidia's profit margins could be at risk owing to the physical size of the GTX 200 chip -- which Nvidia notes is the largest silicon die ever manufactured by third-party chip manufacturer Taiwan Semiconductor Manufacturing(TSM - Cramer's Take - Stockpickr).

A large die size increases the potential for lower manufacturing yields, which in turn drives up the cost per die and weighs on margins. And the company will also have to smartly manage the transition with its previous generation of products, a process that has dented Nvidia's gross margins in the past.

While Nvidia will be under pressure to perform flawlessly as it brings its new chip to market, Fischer says the company is well-positioned to continue thriving, and believes its strategy to go after the high end remains the right formula for success in the graphics business.

"The margins in this business are at the high end," says Fischer. "If you can spend the investment and win that segment, then you can always dumb down that technology to meet everybody else's needs."

Nvidia's chip design appears motivated not only by competition with ATI, but by a growing rivalry with Intel, the world's No.1 maker of PC microprocessors.

Intel, as well as AMD, have each made it clear that the future involves a microprocessor that incorporates graphics processing on the chip, effectively threatening to absorb Nvidia's functionality into their own product and to leave Nvidia out in the cold.

Nvidia's response has been to find ways to increase the role of the graphics processor in a PC, taking on jobs traditionally done by the microprocessor. According to Nvidia, the GTX 200 is really two chips in one: a graphics processor as well as computing processor, whose 240 cores can crunch through certain applications faster than a PC's quad-core microprocessor.

The company has demonstrated how the GTX 200 can speed up certain computing tasks, such as handling high-definition images in a photo editor like Photoshop, as well as preparing video on a PC to be viewable on an Apple(AAPL - Cramer's Take - Stockpickr) Ipod, a process known as transcoding.

Of course, for Nvidia's plan to succeed, software developers need to write software that takes advantage of the GTX 200's parallel processing capabilities.

Nvidia's success in those efforts, as much as its long-running graphics rivalry with ATI, could determine the company's future success.