A little while back, NVIDIA (NASDAQ: NVDA) announced that it would be providing gaming specialist Nintendo (NASDAQOTH: NTDOY) with a custom-designed Tegra processor to power the latter's next-generation Switch game console.
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Image source: NVIDIA.
On NVIDIA's most recent earnings call, CEO Jen-Hsun Huang made some additional comments around the NVIDIA/Nintendo partnership that were quite interesting. Let's look at them.
A multi-year development effort
Huang said that NVIDIA worked with Nintendo "for almost two years" on the development of the Switch.
"Several hundred engineering hours have gone into the development of this incredible game console," the executive told investors on the call. "I really believe when everybody sees it and enjoys it, they're going to be amazed by it."
A potential multi-decade relationship
Huang said Nintendo "tends to stick with an architecture for a very long time." He later said that he thinks Nintendo's relationship with NVIDIA for game console silicon "will likely last two decades" and that he is "super excited about it."
Investors may want to share Huang's enthusiasm for the console, particularly given the Switch's potential to deliver a noticeableboostto NVIDIA's top and bottom lines.
The implication here seems to be that Nintendo may be committed to working with NVIDIA on chips for game consoles beyond next year's Switch. That'd be a positive for NVIDIA, as it would mean that investors wouldn't have to worry too much that the company's Nintendo-related revenue would eventually fall off a cliff.
Taking a broader view of NVIDIA's Tegra strategy
Investors who have been following NVIDIA's strategy have probably noticed that it has evolved significantly since the very first Tegra processor launched in 2008. Previously, NVIDIA's goal in relation to Tegra was to "light every pixel." NVIDIA wanted Tegra processors to power mainstream tablets, smartphones, personal computers, automotive, and specialized gaming devices.
That strategy didn't quite work out, and the company ended up abandoning its smartphone, tablet, and personal computer Tegra processor efforts altogether.
However, NVIDIA has managed to refocus its Tegra efforts on two major opportunities: automotive and gaming. These are both areas in which NVIDIA's high-performance graphics processor technology, NVIDIA's core competency, can serve as real points of differentiation.
Indeed, while NVIDIA's latest merchant Tegra processor, code-named Parker, is clearly designed to try to service a wide range of applications, that changes going forward. The Nintendo Switch features a custom-designed Tegra chip, and the next generation Tegra processor, code-named Xavier, is billed as an "artificial-intelligence supercomputer system on a chip," targeted at applications such as self-driving cars.
That sharpened focus has necessarily shrunken the total addressable market for NVIDIA's Tegra processors. The smartphone and tablet processor markets are extremely large, though they are extremely difficult ones to play in. In return, though, NVIDIA is able to focus on capturing large portions of that total addressable market by building more specialized products that take advantage of NVIDIA's technology strengths.
In a nutshell, NVIDIA's Tegra efforts are now much more focused and better positioned to take advantage of significant opportunities -- such as the Nintendo Switch -- when they come along.
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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. 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.