Updated from 5:55 p.m. EDT

Graphics chipmaker

Nvidia

(NVDA) - Get Report

has snapped up

MediaQ

in a $70 million bid that marks its push into the emerging market for high-end wireless video games.

MediaQ, a private company, makes silicon and software for high-end smart phones and personal digital assistants from manufacturers such as

Dell

,

H-P

and

Palm

.

Nvidia aims to use the purchase to accelerate a push into the wireless market, where it trails rival

ATI

(ATYT)

TST Recommends

.

Nvidia shares rose on the news, ending higher 74 cents, or 3.8%, to $20.46.

Nvidia doesn't have any revenue from the wireless market for handheld gadgets now. But ATI, which has already landed several design wins for smart phones and PDAs, should see its consumer, non-Nintendo-related revenue expand from less than 1% of the total in the most recent quarter to around 10%, notes Brian Alger of Pacific Growth Equities.

While the MediaQ acquisition likely won't have any immediate big financial impact for Nvidia, it marks a strategically important move into an area that has greater growth potential than PCs, he adds. "One of our concerns about Nvidia is that it's too focused on PCs and has lacked external growth drivers. This indicates the company is looking outside the PC market for diversification."

Moreover, the purchase price seems fair, he says, estimating MediaQ's annual revenues at between $30 million to $40 million. "Paying $70 million in cash is fairly inexpensive. It should yield some decent returns in the next year or so."

At Wedbush Morgan, analyst David Wu sounded less positive on the deal. He questions whether MediaQ has any revenue (since the company is private, it's not required to report them). "I doubt

the purchase would be accretive any time quickly," he said. "But in the long term Nvidia needs to diversify away from PCs, period."

He has a hold rating on Nvidia; his firm has no banking relations with the company. "Until they solve their yield on .13 micron, it's hard to know how much they're going to earn," says Wu, referring to recent manufacturing problems related to the adoption of new technology. "They could have profitless prosperity."

In any case both Nvidia and ATI are being elbowed out of the graphics market by

Intel

(INTC) - Get Report

, he adds, referring to a Mercury research report that found Intel claimed the number one market share in graphics in the June quarter.

Nvidia said it will offer more details on the deal when it reports quarterly earnings Thursday.

On July 28, the graphics chipmaker

lopped the top end off its sales guidance for the second quarter, outlining a new revenue range of between $455 million and $460 million, citing manufacturing troubles with a new graphics chip.

Back in May the company had issued a forecast suggesting sales could come in as high as $478 million.

But Alger says there's lingering uncertainty about how quickly the manufacturing problems can be cleared up, a factor that could weigh on its near-term prospects for earnings growth. "Our belief is that they're continuing to have an issue with yields, so their ability to grow in the near term is going to be hamstrung," he says.

For that reason he's pegged Nvidia with an equal weight rating, while granting an overweight rating for ATI. His firm hasn't done banking for either company.