Amazon’s (NASDAQ:AMZN) low cost Kindle Fire is now the second highest sold tablet after Apple’s iPad. The retailer claims that it has captured close to 22% of the US tablet market over the 9 months period since the launch of Kindle Fire. ^[1] With rumors of Amazon releasing the Kindle Fire 2 during its September 6 press event, the blogosphere is abuzz with speculation that the new product will feature Nvidia’s (NASDAQ:NVDA) Tegra 3 quad-core processors. ^[2]

Nvidia began a focused push into mobile computing last year, with ambitions of being more than a graphics chip maker. It positioned its standalone dual-core app processor, Tegra 2, well to capture significant non-iPad tablet market share in 2011. However, with the success of its quad-core Tegra 3 processor, the company plans to make a deeper foray by targeting low-end tablets and cashing in on the huge untapped opportunity that the nascent tablet market offers.

The recently launched $199 quad-core Nexus 7 tablet by Google (NASDAQ:GOOG) leveraged Nvidia’s low cost Kai platform and is powered by its Tegra 3 processor. If Tegra processors power the Kindle Fire 2, as anticipated, then it could significantly accelerate Nvidia’s growth in the mobile computing segment. (Read: Nvidia Has Easier Time Reaching $21 With Nexus 7 Debut)

See Our Complete Analysis for Nvidia Here

Tegra Processors To Become Nvidia’s Most Valuable Business

Nvidia has been eying the lucrative tablet market as a way to challenge Qualcomm’s (NASDAQ:QCOM) growing smartphone dominance. While Nvidia’s Tegra 2 featured in 15 smartphones last year, Tegra 3 is expected to power around 30 devices this year. The world’s first Tegra 3 phone was launched in February by HTC, and other phone wins around the corner include ZTE with Tegra plus Icera phones, Fujitsu, LG and K-Touch.

Nvidia has had significant wins with its Tegra 3 processors this year: the world’s first RT device by Asus, Google’s Nexus 7 Tablet and Microsoft’s Surface Tablet. Tegra 3 revenues increased by close to 50% and 35% in Q1 and Q2 2012, respectively, and Nvidia expects the shipment to almost double in 2012. With the pace of design wins that the company has registered so far, it does not look like a far-fetched target to us. We estimate Tegra revenues to cross the $2 billion mark by the end of our forecast period.

Potential Threat: Qualcomm’s Quad-Core Processors

Qualcomm has been working closely with Microsoft and preparing its Snapdragon processors for the Windows 8 tablet to be launched later this year. The company also recently showcased its chipset with a quad-core Krait CPU, which might negate Nvidia’s competitive advantage in the coming quarters. Additionally, with LTE featuring in most tablet manufacturers’ plans in 2012 and beyond, Qualcomm will be looking to leverage its dominance in the LTE market to win deals for its integrated Snapdragon application processors. (Read: Qualcomm Leads the LTE Charge In 2012)

Our price estimate of $21.87 for Nvidia is at a premium of above 40% to the current market price.

Understand What Drives a Stock at Trefis

1. Amazon Kindle Fire sold out as new model expected, Hindustan Times, September 3, 2012 [↩]
2. Amazon Kindle Fire 2 release date, news and rumours, Tech Radar, August 24, 2012 [↩]