Updated from 10:31 a.m. EST

Graphics cards aren't just for PCs anymore.

That's the message Nvidia ( NVDA) and ATI Technologies ( ATYT), the leading graphics-chip specialists, have been trying to get through to investors in recent years.

With their core PC markets under attack by Intel ( INTC), both companies have started to roll out versions of their chips targeting a variety of non-PC devices, including mobile phones, digital TVs and medical equipment.

Those investments have started to pay off, and for both companies, those non-PC products are becoming increasingly important to their top and bottom lines. But some analysts question just how big the market for graphics chips outside the PC industry will become and how well Nvidia and ATI will be able to compete.

"They are to be congratulated for diversifying, but ... shareholders should not get overenamored with the diversification efforts as being the path to riches," says Jon Peddie, an analyst from Jon Peddie Research, which focuses on the graphics-chip industry.

At first glance, the non-PC markets seem to represent a promising opportunity for the graphics-chip makers. The global handset market is fast approaching a billion units, for instance, and the digital television market is growing to tens of millions of units in the U.S. alone.

Even if Nvidia and ATI were to capture only small fractions of those two markets, that could translate into millions of chips.

As ATI has expanded from producing graphics chips for PCs to entering the consumer electronics markets, the company believes that the total addressable market for its products has gone from about $5 billion a year to around $13 billion, says Matt Skynner, the company's vice president of corporate marketing.

Meanwhile, Nvidia believes it could eventually see a billion dollars in sales just from its business of selling graphics chips for mobile phones, says Mike Hara, Nvidia's vice president of investor relations and communications.

The companies have a reason to be looking for new markets for the chips. Although the PC industry has showed renewed vigor in recent years, many analysts expect it to cool off eventually. In the meantime, Intel has been capturing increasing share of the graphics-chip market in the PC realm by integrating a graphics processor with its CPUs.

Right now, Intel's graphics chips primarily dominate the low end of the graphics chip market, but some analysts believe the company will go increasingly upscale, attracting more and more of the PC gamers who make up the core audience for ATI and Nvidia's chips.

ATI and Nvidia "can't see their market go away by 80%. ... They have to find a new line of business," says one technology analyst at a financial services firm, who asked not to be named, but whose firm has not done investment banking for either company.

Both companies are clearly trying to find those new lines of business. Both companies, for instance, are players in the next generation of video-game consoles, with Nvidia linking up with Sony ( SNE), and ATI allying with Microsoft ( MSFT) and Nintendo.

But video-game consoles are a space that both have played in before. For both companies, the real move to diversify revenue has come from other consumer electronics industries.

Nvidia, for instance, has focused in large part on the mobile-phone industry; both Motorola ( MOT) and Sony Ericsson have incorporated Nvidia chips into their latest phones.

ATI, which is likely to give an update on its own diversification efforts later this month when it reports its fiscal second-quarter results, has been pursuing both the cell-phone and digital TV markets, selling chips to LG Electronics and Samsung in the handset market and Sony and Matsushita in the television space.

ATI's combined sales in the digital television, handset and game-console markets jumped 37% in its most recent fiscal year to $316.8 million, in the process rising from less than 12% to more than 14% of the company's overall revenue.

At Nvidia, sales of chips for mobile phones increased 28% in its last fiscal year to $58.7 million, outpacing the company's overall revenue growth.

But the non-PC businesses are still challenging for both companies. Nvidia, for instance, posted an operating loss of $34.9 million last fiscal year in its mobile-phone business.

Though ATI posted a $31.5 million operating profit in its non-PC business in the last fiscal year, its operating margin for that business was just 10%, even with what is expected to be the high-margin contribution of the game-console revenue.

One of the problems the companies face is cost. In the PC industry, Nvidia and ATI's core customers are PC gamers who think nothing of paying hundreds of dollars for the latest and greatest graphics chips.

But the handset and TV markets are becoming volume markets, analysts say. If a phone company is selling a handset for $50, the graphics chip inside the phone can't cost more than a couple of dollars, they add.

In mobile phones, ATI for instance is "doing well in units," says Peddie. "But it's not a high-revenue or a high-margin product."

While TVs obviously sell for a lot more than phones, the cost pressures are similar, says the technology analyst.

"One of the things you have to know about the consumer space is all of a sudden you're looking at device that's selling not for $1,000, but for $100 to $200," the technology analyst says.

That translates into "skinny" profits, he says. "As good as this business may be for the graphics-chip companies, it will likely be dilutive to margins."

Another problem the companies face is competition. While there are basically three main players left in the PC graphics-chip business, there are numerous current or potential players in the handset and TV markets, analysts say.

In the handset business in particular, there's an emphasis not only on cutting costs, but also on power efficiency, placing a premium on companies that can integrate as many features as possible onto a single chip. While ATI has already moved into the so-called system-on-a-chip business, Nvidia has not.

Regardless, with voice calling -- not graphics displays -- the primary use for phones, companies that have technical expertise in wireless radios and traditional phone chips may have a leg up on the graphics-chip makers on creating integrated chips for the handset space, analysts say.

"There are lots of people going after cell phones," says the technology analyst.

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