Android Market May Decide Fate of Nvidia's Tegra 2 Chip

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Chipmaker Nvidia ( NVDA ) has released a new version of its Tegra mobile processor. Nvidia competes mainly with Intel ( INTC ) in the mobile processor market.

Although the first Tegra chip lost the market battle to Intel's Atom processor, Tegra 2 promises significant performance benefits over its predecessor. According to Nvidia, it runs four times faster than Tegra 1, consumes less power and can process HD graphics.

However, we don't think performance alone can guarantee that Tegra 2 will be a hit for Nvidia. Rather, we believe that the success or failure of the Tegra 2 chip will be influenced heavily by market demand for smartphones running Google's ( GOOG ) Android mobile operating system. Our analysis follows below.

Tegra 2 and Android

The first generation Tegra chip was optimized for Microsoft's ( MSFT ) Zune platform, while Tegra 2 is primarily geared toward the Android mobile device market. Early indicators suggest that Android device manufacturers are taking Tegra 2 seriously. According to Nvidia, 50 device makers are currently building Tegra-powered devices. They include LG ( LG ), which is is building a new line of Android-based smartphones and tablets around the Tegra 2.

The next generation of Android-based phones are likely to emphasize performance, which should help Nvidia  because of the Tegra 2's superior processing power.

Nvidia's initial focus on the Android platform essentially creates a symbiotic relationship between Android and the Tegra 2 processor.  The more widely Android is adopted, the more chips Nvidia will sell.

Nvidia reports Tegra processor sales as part of its mobile and game console computing chip division, which constitutes 10.8% of our stock price estimate for the company. We currently expect revenues from this division to approach $600 million by the end of the Trefis forecast period, up from about $200 million this year.

You can drag the trend-line in the chart above to create your own mobile and game console chip sales forecast for Nvidia and see how it impacts the company's estimated share value.

Android app library still lags Apple's

The Android OS has been gaining market share rapidly in recent quarters, according to data from tech research firm Gartner . In the second quarter of 2010, worldwide sales of Android-based phones surged to 10.6 million, up from just 755,000 in the year-ago quarter.

Android-based phones accounted for 17.6% of worldwide smartphone sales in the second quarter of 2010, up from 1.8% in the second quarter of 2009.

Although Android is now a more popular mobile OS than Apple's ( AAPL ) iOS,  Android  offers fewer mobile apps. According to  fiercedeveloper.com , the Android Market storefront currently offers somewhere between 70,000 and 90,000 apps in its mobile storefront, compared to about 225,000 apps in Apple's App store.

Going forward, we expect Google to improve the Android Market storefront in an effort to attract more developers and users to its platform and consequently drive Android-based phone sales.

Bottom line

Positive indicators for the Tegra 2 chip include its superior performance and growing demand for Android-based smartphones and tablet PCs.

The first wave of devices powered by the Tegra 2 chip should hit the market in the next few months. If successful, they could drive faster growth in Nvidia's mobile & game console computing chip revenues , creating a potential upside for the stock.

You can see the complete $11.77 Trefis price estimate for Nvidia's stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , GOOG , INTC , LG , MSFT , NVDA

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