Slowing PC market and rising competition
With the advent and adoption of social, mobile, analytics, and cloud (or SMAC), the PC market is poised for a steady decline. With Microsoft’s (MSFT) decision to stop support for its XP model, a small revival was expected. However in the long run, PC shipments are expected to decline.
Since NVIDIA’s graphics chips and products cater to the majority of PC manufacturers—Dell, HP (HPQ), Toshiba, and Sony (SNE)—any slowdown in the PC market will impact its prospects. Although the company diversified into the gaming, tablets, and automotive sector, its prospects might be limited because of the PC market’s decline.
In the graphics market, as discussed earlier in this series, Intel (INTC) and AMD (AMD) are other leading players in high-end graphics. Any product launch or lower prices would pressure NVIDIA into lowering the prices of its products. NVIDIA has a series of concerns, but lowering product prices is one of the main concerns.
AMD witnessed increased revenue from its game console business. It also launched a new graphics API code—Mantle.
Short product cycles pressure profitability
Graphics processing is a very fast-paced and short-lived field. Gamers and high-end computer users usually prefer the launches that win the latest benchmarks. Also, the semiconductor industry is cyclical. As a result, it’s difficult for companies to make huge research and development (or R&D) investments to consistently make the best chip every year.
At the same time, a loss of technology leadership means that NVIDIA will lose its competitive advantage. This will lead to lower margins through lower revenues and increased R&D spending. Also, as the above chart shows, developing a competitive advantage is challenged by shifting consumer preferences and the delay in getting products to market.
To learn more about the semiconductor industry, please read “The semiconductor market: Some of the challenges explained.”