The Worst Mistake NVIDIA Investors Can Make Right Now

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Chipmaker NVIDIA (NASDAQ: NVDA) churned out double-digit sales growth over the past six quarters, fueled by the robust sales of its GPUs and Tegra CPUs. Next-gen games lifted sales of its gaming GPUs, its data center GPUs were frequently used for machine learning purposes, and the evolution of connected cars boosted sales of its Tegra CPUs.

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By most accounts, NVIDIA is firing on all cylinders. Even after rallying more than 200% over the past 12 months, analysts expect momentum in its business to continue with 19% sales growth and 21% earnings growth this year.

However, the worst mistake NVIDIA investors can make now is to assume that its growing automotive division can't be disrupted. Let's take a closer look at the automotive businesses and the upcoming threats that could derail its growth.

Understanding NVIDIA's automotive business

Several years ago, NVIDIA tried to enter the smartphone market with its ARM-based Tegra CPUs. But after losing that battle to Qualcomm (NASDAQ: QCOM), NVIDIA pivoted the Tegra toward a more promising market -- navigation and infotainment systems in high-end cars.

Today, a growing list of automakers -- including Toyota, Honda, Audi, Mercedes-Benz, and Tesla Motors -- all use Tegra chips to power their infotainment and navigation systems. NVIDIA capitalized on that first-mover's advantage to launch Drive PX, an onboard Tegra-powered "supercomputer" that adds driverless features to regular vehicles.

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Since many automakers believe driverless cars will hit public roads within the next decade, the Drive PX platform represents an elegant "turnkey" method of transforming regular vehicles into autonomous ones. That's why NVIDIA's automotive CPU revenues rose 24% annually last quarter and accounted for 7% of its top line.

Here come the new challengers...

Some NVIDIA bulls believe that the chipmaker will keep dominating the automotive space, making it a top play on the fledgling driverless car market. However, NVIDIA already faces two major challengers in that market -- Qualcomm and Intel (NASDAQ: INTC).

Qualcomm is diversifying away from its mobile chipmaking and licensing businesses, due to the commoditization of the chipmaking market, as well as legal and regulatory challenges to its licensing business. That's why it bought IoT and automotive chipmaker CSR in 2015, introduced Snapdragon SoCs for cars last year, and now plans to buy NXP Semiconductors (NASDAQ: NXPI) -- the biggest automotive chipmaker in the world.

Qualcomm's moves should bother NVIDIA, since its Snapdragon Automotive chips directly challenge its Tegra chips in infotainment and navigation systems. Qualcomm can also counter NVIDIA's Drive PX with NXP's BlueBox, a comparable autonomous driving platform that is already being tested by several major automakers.

Meanwhile, Intel sells its Atom chips to automakers like Hyundai, BMW, Kia, and Infiniti to power their infotainment and navigation systems. Since its automotive presence isn't as significant as NVIDIA's or Qualcomm's, Intel beefed up that business with several acquisitions. Last year, it acquired IoT (Internet of Things) functional safety firm Yogitech and computer vision companies Itseez and Movidius.

Earlier this year, Intel agreed to buy Mobileye (NYSE: MBLY), the world's largest maker of ADAS (advanced driver-assistance systems). Roughly 90% of the world's top automakers use Mobileye's ADAS solutions, which can "see" and respond to obstacles with cameras and radars. Mobileye also believes that the fifth generation of its EyeQ chips will enable fully autonomous vehicles to hit public roads in 2020. These moves all make Intel a growing threat to NVIDIA.

So should NVIDIA investors worry?

For now, NVIDIA remains the market leader in infotainment/navigation chips and driverless supercomputers. Unlike Qualcomm and Intel, NVIDIA also clearly discloses the growth of its automotive chip business on a quarterly basis.

But once Qualcomm closes its purchase of NXP, a lot could change. Qualcomm could bundle its Snapdragon Automotive chips, NXP's BlueBox, and other automotive chips together to undercut NVIDIA. Intel could employ a similar strategy by bundling together Mobileye's ADAS solutions, its own Atom chips, and other IoT and computer vision technologies.

Qualcomm and Intel don't represent major threats to NVIDIA yet, but that could change in the near future. Therefore, investors should keep an eye on these risks and see how they impact NVIDIA's automotive business.

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Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Nvidia and Tesla. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Intel and NXP Semiconductors. The Motley Fool has a disclosure policy.