Nvidia May Need to Beef Up its Tegra 2 Chip

April 7th, 2011 by Trefis Team
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While Nvidia (NASDAQ:NVDA) made headlines this year with its launch of the world’s first dual-core processor for mobile devices (Tegra 2), Apple (NASDAQ:AAPL) replied with its own competitive A5 processor for the iPad 2. Apple’s processor provides a real challenge to Tegra 2, meaning that Nvidia might now need to beef up its chip. Nvidia competes primarily with AMD (NYSE:AMD) and Intel (NASDAQ:INTC) in the processors and graphics business.

Our price estimate for Nvidia’s stock stands at $21.29, a premium of about 20% to the stock’s current market price.

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Apple’s A5 Seems to Have an Edge

Some tests suggest that, while CPU performance of Tegra 2 vs. A5 is more or less similar, A5 beats Tegra 2 by far when it comes to graphics performance. [1] This comes as a blow to Nvidia, a company known for its graphics cards. According to Anand Shimpi, of the chip review site AnandTech:

For 3D gaming, the iPad 2 is much faster–there’s no contest. The iPad 2 GPU is just much more powerful than Tegra 2’s GeForce. [1]

How much does graphics performance matter for tablets? A lot, we’d argue. The iPad is meant to be a consumer entertainment device, not particularly geared for business usage. Be it gaming, HD videos, or multi-tasking, graphics performance will be key.

Nvidia’s Problem

The problem seems to boil down to chip size. Apple’s chip is much larger than Nvidia’s Tegra 2, a probable reason why its A5 processor has been able to provide better graphics performance. [2]

Bigger chips with better graphics would cost more, and that might not be acceptable to Nvidia’s customers who are making tablets to compete with Apple’s iPad. A key value proposition for these manufacturers could be lower price, as Apple has a history of not compromising on premium prices. This puts pressure on Nvidia to produce more cost-efficient chips.

A Forbes blog discusses ample opportunities for Nvidia in the tablet space, as manufacturers look to challenge Apple’s dominance. These opportunities should bolster Nvidia’s Tegra chip sales. [3]

But this conclusion might be a bit premature, since Tegra 2 seems to lag Apple’s A5 on key graphics features. Until this is resolved, it’s tough to gain full confidence in Tegra 2’s sales prospects. So the options with Nvidia are to either increase its chip size, or pack more powerful performance within the same chip size. Nonetheless, the threat from Apple isn’t going away.

See our complete analysis for Nvidia’s stock here

Notes:
  1. Apple trumps Nvidia in tablet gaming, CNET News, Mar 14 2011 [↩] [↩]
  2. Apple, Nvidia: A5 Chip Has Reason To Be Big, Says RBS, Barron’s, Apr 1 2011 [↩]
  3. Nvidia Gets Another Shot At Tablets. And Another, And Another…, AForbes, Apr 5 2011 [↩]