Should AMD Worry About Nintendo's Use of Nvidia Chips?

By Markets Fool.com

Nintendo (NASDAQOTH: NTDOY) recently revealed the Switch, a hybrid gaming console that seamlessly transforms from a handheld into a home console via a dock and detachable controllers.

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The design aesthetic is similar to the Wii U's, except that the Wii U's handheld mode only works when the touchscreen controller is in range of the base console. The Switch is also similar to Nvidia's (NASDAQ: NVDA) Shield tablet, which transforms into a home console when connected to a TV and a controller.

Image source: Nintendo.

Therefore, the revelation that theSwitch will be powered by Nvidia's Tegra CPUs instead of AMD's (NASDAQ: AMD) APUs wasn't all that surprising. But that shift also indicates that AMD's iron grip on the console market might be weakening.

AMD's APUs (which combine CPUs and GPUs) currently power Sony's (NYSE: SNE) PS4 and Microsoft's (NASDAQ: MSFT) Xbox One, and its GPUs powered the Wii and Wii U. If Nintendo's use of Tegra chips indicates a fresh start for Nvidia in the gaming console market, should AMD start worrying?

Don't underestimate the underdog...

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Nintendo is often considered an underdog in the console market. After all, it's only sold 13.3 million Wii Us worldwide, compared to 22.3 million Xbox Ones and43.4 million PS4s. The Wii U's smaller audience and weaker hardware specs also caused many publishers to shun the console during cross-platform releases.

However, many critics overlook the fact that Nintendo's 3DS handheld is actually the best-selling console of the current generation, with 59.3 million units sold worldwide. Sony, by comparison, has only sold 14.3 million PS Vitas.

With the Wii U, Nintendo was trying to leverage its strong position in handhelds to expand into living rooms. But since the Wii U controller couldn't work as a stand-alone handheld, it was never clear exactly who the console was designed for. The Switch, however, sends a clear message that it's a console that can be played anywhere.

Why Nintendo picked Nvidia

Nintendo executives likely noticed that Nvidia was using its Shield devices to showcase the power of its Tegra SoCs, which were marginalized in the mainstream mobile market by Qualcomm. Like Nintendo, Nvidia was pursuing a "gaming anywhere" strategy.

For example, the Shield tablet plays regular Android games on Google Play and Shield-optimized games through Nvidia's Shield Hub, and streams PC games over home networks. In "console mode", the device attaches to a TV and a controller.

Like the Shield tablet, the Switch's "brain" is really just a powerful gaming tablet. Since AMD's tablet-based Micro Series APUs aren't as well-known as Nvidia's Tegra SoCs, it made sense for Nintendo to use Nvidia's chips. Jefferies & Co. analyst Mark Lipacis recently estimated that the Switch could add upto $320 million in annual revenues to Nvidia's top line.

The Shield tablet K1. Image source: Nvidia.

What this means for AMD

AMD depends heavily on sales of semi-custom APUs for the PS4 and Xbox One to support its EESC (Enterprise, Embedded, and Semi-Custom) business, which generated over 60% of itssales last quarter. During that quarter, EESC sales rose 31% annually on robust sales of gaming consoles.

Sony and Microsoft's upgrades for their consoles -- like the PS4 Slim, PS4 Pro, Xbox One S, and Xbox Scorpio -- are expected to keep the APU orders flowing. Therefore, the impact of Nintendo's decision to use Nvidia's chips might seem minimal.

However, investors should remember that AMD didn't always dominate the console market -- the original Xbox was powered by an Nvidia GPU, and the PS3 used a proprietary GPU co-developed by Nvidia and Sony. Therefore, if the Switch sparks a new form factor revolution, Sony or Microsoft might consider launching new hybrid devices also powered by Nvidia's Tegra chips.

Another battleground for AMD and Nvidia?

In addition to moving in on AMD's turf in consoles, Nvidia has been aggressively attacking AMD with budget graphics cards like the 3GB GTX 1060 ($200), the 4GB GTX 1050 Ti ($139), and the 2GB GTX 1050 ($109). Those new cardsrecently forced AMD to reduce the prices of its 4GB RX 470 to $170, and its RX 460 to $110.

Whereas AMD could previously generate revenue from niches like gaming console APUs and low-end GPUs, Nvidia seems intent on pushing its only meaningful rival in GPUs out of the market. It's unclear if Nintendo will give Nvidia the momentum it needs to make an impression on Sony and Microsoft again, but AMD investors should pay close attention to the Switch's arrival this holiday season.

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Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Nvidia and Qualcomm. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.