NEW YORK ( Trefis ) -- Nvidia's ( NVDA) profit margins from its mobile and gaming console computing chips business have started to pick up after seeing steep declines during 2006-2008 due to lower royalty income from Sony's PS3 (powered by Nvidia's GeForce chips) and the overall sluggish economy leading to lower consumer spending.

As Nvidia gears up for Tegra 2 processor, which it recently showcased at Consumer Electronics Show (CES) 2011, and given the unprecedented growth in smartphones and tablets, we expect Nvidia's margins to benefit tremendously. Nvidia competes with Qualcomm ( QCOM), Texas Instruments ( TXN), Infineon, and Broadcom ( BRCM) in mobile and gaming console chips market.

While we expect Nvidia's EBITDA margin from mobile and gaming console chips will reach just over 32% by the end of Trefis forecast period, Trefis members expect that the margin will cross 36% translating to small upside potential from our forecast. Since mobile and game console chips constitute only around 9% of Nvidia's stock, on the basis on our estimates, any change to the margins from this business segment will have minimal impact on its stock price.

Nvidia Ramps Production of Tegra Processor Chips

Nvidia is focusing on improving the production as well as introducing newer versions of its Tegra line of graphics chips. Increased volumes and a focus on a single line of products will yield improved utilization levels, which is in turn expected to increase profit margins higher.

Nvidia recently showcased Tegra 2 super chip at CES 2011 at Las Vegas. Tegra 2 will power a range of new generation smartphones and tablets. Few of these include LG Optimus super phone, Motorola Xoom for Verizon, T-Mobile G-Slate with Google by LG, Dell Streak 7 for T-Mobile, Acer ICONIA as well as tablets by Asus and Toshiba. Tegra 2 offers the world's first mobile dual-core CPU with up to 2x faster browsing, hardware accelerated Flash, and console-quality gaming with an ultra-low power (ULP) Nvidia GeForce GPU.

Unprecedented Growth in Smartphones, Tablets

The year 2010 has seen tremendous growth in tablets, TVs, smartphones and other web connected devices. We expect the growth momentum to continue in the future years as well. As a result of growth in these devices, demand is rising for better graphics and audio/video output. We expect Nvidia to be a key beneficiary of this growth, which should boost its margins.

Trefis Community Forecast

Trefis members expect mobile & game console computing chips adjusted EBITDA margin will increase from near 17% in 2010 to over 36% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from 13% to just over 32% during the same period.

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