NVIDIA Corporation's Tablet Recall Reveals Something Interesting

By Ashraf EassaFool.com

recently announced that it is recalling Shield tablets sold between July 2014 and July 2015. The company says that the batteries inside the devices "can overheat, posing a fire hazard."

The recall itself isn't anything that shareholders should get worked up about; it was a relatively low-volume product and the impact on the company's financialsshould beminimal. Whatis interesting, though, is that as a result of this recall, investors cannow glean some insight into the financials of NVIDIA's device business.

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Unit sales and estimated revenue According to PC World, 88,000 Shield tablets will be recalled. Since NVIDIA is recalling devices sold starting in July 2014, which is when the device formally launched, it would seem that this number represents all Shield tablet shipments.

To try to get a sense of what kind of revenue NVIDIA was able to generate from these sales, I'm going to assume that two-thirds of the devices sold were the $299 16 gigabyte model and the remaining third were the $399 model, implying an average selling price of $333.

If we multiply unit shipments by my estimated average selling price, we get total revenue of approximately $29.304 million in the period between July 2014 and July 2015. Overall Shield tablet-related revenue is likely higher, though, as the company offers additional accessories for purchase.

Putting this into perspective Sales of NVIDIA's devices, including the Shield tablet, are included under the "Tegra Processor" line item in the company's earnings reports. In fiscal 2014, this segment brought in $398 million in revenue, and in its fiscal 2015, $579 million.

The roughly $29 million that NVIDIA seemingly brought in from sales of Shield tablets, along with whatever revenue it enjoyed from accessory sales, represents a small fraction of its annual Tegra processor revenue.

Furthermore, I believe that the gross margin percentages that NVIDIA sees on sales of consumer-oriented devices like the Shield tablet and the Shield Portable are likely substantially lower than the gross margin percentages that the company sees on chip sales. This would suggest that these devices contribute even less to gross profit dollars than they do to revenue dollars.

Should NVIDIA exit the devices business? With the first Shield, NVIDIA made a play for the mobile gaming device business, but given that the company didn't launch a direct successor to that device, it probably didn't do all that well in the marketplace.

Then, with the Shield tablet, we know that unit sales and revenue weren't all that large, which may explain why we haven't seen a successor to the original Shield tablet using the latest Tegra X1 processor announced earlier this year.

It would seem that the future of NVIDIA's devices business is dependent on the performance of the Shield Android TV box in the marketplace.

The device is pricier than the competition (the Shield Android TV starts at $199, while the Fire TV sells for $99) and, according to PC World, is "rough around the edges in both hardware and software."

However, it has been praised for its fast performance, gaming functionality, and 4K streaming capability.

If NVIDIA can sell significantly more Shield Android TV boxes than it did Shield Portables or Shield tablets, then there might be a reasonable business case for the company to stay in the devices business.

However, if the Shield Android TV winds up being a cool-but-niche device that only captures a small amount of market segment share, then we might see NVIDIA simply exit the devices business altogether.

The article NVIDIA Corporation's Tablet Recall Reveals Something Interesting originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. It recommends and owns shares of Amazon.com. 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.

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