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Investing in Graphics Processors

Written By Brian Hicks

Posted January 7, 2014

You know that crop circle that was all over the news last week? Turns out it was just a 310-foot long publicity stunt put on by none other than NVIDIA (NASDAQ: NVDA), the maker of graphic processing units (GPU), chips used in personal computers (PCs) and smartphones.Computer Graphics Polygon GPU

The big mystery was finally solved Sunday when NVIDIA revealed to the public at the annual Consumer Electronics Show in Las Vegas that it was just a friendly hoax: a ploy for their new computer chip.

The crop circle was made as a stylized image of the new Tegra K1 chip for tablets and smartphones, and had the number “192” in Braille – the number of computing cores, or mini-computers, used in the Tegra K1 applications.

All that fuss over a little computer chip, but it worked! It got us talking about it, and now, here we are.

In simplest terms, a GPU is a single-chip processor used primarily for computing 3D functions like lighting effects, object transformations, and 3D motions.

NVIDIA was the first company to broadly use the “GPU” moniker, and it successfully brought a powerful professional technology to the consumer.

NVIDIA in 2014

They’re at it again; bigger and badder than ever before with its brand new Tegra K1.

Since 1993, the Santa Clara, California, company has been pushing the limits in visual computing; taking ideas and turning them into interactive realities for the world of gamers, scientists, and consumers, alike.

NVIDIA’s core business has been in creating a chip used to enhance the visual experience and performance of PC games. They’ve also had some success in the realm of mobile devices with smartphones and tablets, but that success has been dwarfed by what Qualcomm (NASDAQ: QCOM) has been able to do.

But that doesn’t much matter right now. That’s because the revolutionary Tegra K1 mobile processor, with its 192-core super chip that features the same NVIDIA Kepler architecture that powers the fastest GPU on the planet, the NVIDIA GeForce GTX 780 Ti, according to NVIDIAnews. For the first time ever, gamers will have the same gameplay they’ve come to love on their PC, but on a mobile platform.

This is major news for the gaming industry.

The Tegra K1, incorporating the Kepler design, typically used in high-end PCs, will make for a chip that can make your tablet (a market growing leaps and bounds in gameplay) more powerful than your Xbox 360 or Playstation 3 game console, according to San Jose Mercury news, all while using one-twentieth the power. Essentially, this chip brings mobile computing and desktop computing onto the same level. And the new chip, with its 192 cores, is way more than NVIDIA’s latest benchmark chip, the Tegra 4, with only 72 graphic cores.

And if you’re wondering how gameplay would stack up to your new Xbox One or Playstation 4 console, the Tegra K1 delivers comparable graphics features, and it’s all in the palm of your hand.

NVIDIA will offer the Tegra K1 in two pin-to-pin compatible versions, according to NVIDIAnews, both of which will be powered by the 192-core NVIDIA Kepler GPU. The first, expected in devices for the first half of 2014, offers a 32-bit quad-core, 4-Plus-1 ARM Cortex A15 CPU. The second, available the second half of the year, has a NVIDIA-designed 64-bit dual Super Core CPU.

Getting gamers everywhere giddy over the Tegra 1, its features allow it to run the world’s most advanced game engine, the Unreal Engine 4, used to power games on high end PCs and consoles. And again, it’s right there in the palm of your hands.

Ups and Downs

There is just one problem that NVIDIA faces. Its two separate divisions are operating on opposite ends of the spectrum. One is highly profitable, and one is not.

The GPU business is thriving. This is where you find your gaming revenues and various sectors and product lines that revolve around the GPU. You’ve also got NVIDIA teaming up with IBM (NYSE: IBM) to work on their IBM Power Systems that will help drive business from Big Data and analytics.

It’s hard to tell just how big this collaboration could become.

It’s important to note also that NVIDIA just lost the Apple Mac Pro GPU slot to Advanced Micro Devices (NYSE: AMD), and it could eventually start losing revenues to Intel (NASDAQ: INTC) as they improve their own integrated graphics systems to be just as good as discrete graphics processors.

But overall, the GPU business is stronger than ever, and will be profitable in the foreseeable future.

The Tegra Processor business on the other hand, is a bit harder to speculate on. It reported a negative operating margin of 119.4 percent in the latest quarter, according to Seeking Alpha. This segment is based on the product lines of Tegra system-on-a-chip and modem processor technologies. We have to remember, too, that NVIDIA just announced its new Tegra K1 on Sunday, so its success will not be reflected here.

This division broke even in Q3 of 2012, and since has taken a nose dive. There were problems with the Tegra 4 and the integration of the Tegra 4i, according to Seeking Alpha, and the Tegra 5 had low power Kepler graphics.

How these processors are received in the next two quarters and how well the Tegra K1 is initiated will determine how well this part of NVIDIA’s business will do moving forward.

The Investment

In twenty years of business, NVIDIA took the GPU mainstream and revolutionized consumer graphics technologies more than any other single company. And with this new Tegra chip, the limits to gaming seem endless.

But still, there are variables that will need to play out. NVIDIA the brand is strong, but just how strong it will be in 2014 is hard to say today.

It will be interesting to see what competitors like Intel will be able to come up with, and how well preexisting Tegra chips and the new Tegra K1 will fare in the marketplace.

I’m guessing it’s going to be a slam dunk. If it’s up to me, it’s game on!

For gamers everywhere: play on, player.