This cost absorption has affected Nvidia's near-term margins and is one of the reasons why the Street continues to have doubts about this company. For instance, although the overall sales numbers look solid, the fact that Tegra revenue declined 22% year over year sticks out like a red thumb. The good news is this strategy has worked as well as can be expected. Not only is Nvidia's Tegra line of chips gaining traction, but the costs to grow market share have not adversely impacted the company's operating margin.

Management understands what's at stake regarding mobile market share. Plus, Nvidia, which is still dependent on PC sales for roughly two-thirds of its revenue, has been working hard to broaden its portfolio. To that end, the Tegra line of mobile processors, which is a system-on-chip (SoC) that integrates many of the features of the ARM architecture into one package, has taken a major focus.

As it stands, outside of the Nvidia investment community, Tegra is not as wildly known as Qualcomm's Snapdradon or Broadcom's line of BCM LTE chips, but Tegra is gaining meaningful ground. Here again, during the conference call, Nvidia's management pulled no punches, saying the company's Tegra 4i "delivers three times higher performance than Qualcomm's S400 solution."

What's more, Nvidia continues to secure business some prominent companies including Microsoft ( MSFT) and Google ( GOOG) where the Tegra is a key component inside both Surface and Nexus 7 tablets. Device manufacturers are beginning to realize Tegra's features such as low power consumption coupled with high performance makes this series one of the best chips on the market today.

Bottom Line

If Nvidia can maintain revenue growth rate of 5% while also growing its Tegra market share, this company can become a legitimate competitor to Qualcomm and Broadcom in the next couple of years.

Accordingly, expecting the stock to trade in the $18 to $20 range over the next 12 to 16 months is not unrealistic. Despite Nvidia's 20% year-to-date gains, I think the stock is worth a gamble here for the long term. The risk-reward trade-off still favors holding.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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