Will Apple Choose AMD’s Fusion Chips Over NVIDIA?

The launch of AMD’s Fusion chip or “Llano,” which combines the central processing unit (CPU) and graphics processing unit (GPU) has been pushed to next year. Meanwhile, at the recent Intel Developer Forum Intel announced a new multi-function chip, Sandy Bridge, that integrates graphics and video processing. Will such hybrid chips render graphics chips obsolete and threaten the future of graphic chip maker NVIDIA?

NVIDIA’s Financials

Let us first take a look at NVIDIA’s recent performance. NVIDIA (NASDAQ:NVDA) last month reported second quarter revenue of $811.2 million, up 4.5% y-o-y and down 19% q-o-q. Net loss was $141 million or $0.25 per share compared to a profit of $137.6 million or $0.23 per share last quarter and loss of $105.3 million or $0.19 per share last year. Gross margin was down to 16.6% from 45.6% last quarter and 20.2% last year.

The poor results were due to a large inventory write-down and a charge related to a weak die/packaging material set. The inventory write-down was a result of weakened demand for consumer GPUs as higher memory prices and economic weakness in Europe and China led to a greater-than-expected shift to lower-priced GPUs and PCs with integrated graphics.

NVIDIA Pushes into Smartphones

NVIDIA has been pushing to enter the lucrative smartphone market, and its efforts have paid off with LG opting for NVIDIA’s dual core Tegra chips in its new Optimus smartphones. Toshiba also plans to launch its first tablet based on Android using NVIDIA’s Tegra chips.

For the third quarter, NVIDIA said that it expects revenue to be up 3% to 5% from the second quarter. Gross margin is expected to increase to 46.5% to 47.5%. The stock is currently trading around $12 with market cap of about $7 billion. It hit a 52-week high of $18.78 on December 30 of last year and a 52-week low of $8.65 on August 12 following its second quarter results.

Hybrid Chips Lead the Way

NVIDIA already seems to be bearing the brunt of the market’s shift to integrated graphics. The hybrid chips from Intel and AMD could only make things worse for the company unless it also develops hybrid chips.

Dean Takahashi of Venture Beat also asks if Intel’s new chip will kill off NVIDIA. He points to Anand Lal Shimpi, a hardware reviewer at AnandTech who thinks that it will not kill off the entire $600 million graphics market but will threaten the entry-level market. According to iSuppli, about 80% of PCS shipped in 2014 are expected to have hybrid chips.

AMD’s Financials

For its second quarter, AMD (NYSE:AMD) reported revenue of $1.65 billion, up 40% y-o-y and 5% q-o-q. Net loss was $43 million or $0.06 per share compared to a loss of $330 million or $0.49 per share last year and profit of $257 million or $0.35 per share last quarter. On a non-GAAP basis, AMD made a profit of $83 million or $0.11 per share excluding the $120 million loss related to Global Foundries, the manufacturing arm of AMD that was spun off last year. Gross margin was 45% compared to 47% in the previous quarter, and the company ended the second quarter with $1.9 billion in cash and equivalents.

Computing solutions revenue increased 31% y-o-y and 4% q-o-q driven by record notebook microprocessor and chipset unit shipments. During the quarter, Sony joined its list of customers that includes leading computer makers, HP, Dell, Acer, and Lenovo which recently announced new notebooks featuring VISION Technology from AMD.

Graphics revenue increased 87% y-o-y and 8% q-o-q. AMD said it has shipped more than 16 million Microsoft DirectX 11-capable GPUs in just three quarters. Dell has recently adopted the latest ATI FirePro™ professional graphics products in its highest-performing workstations designed for graphics-intensive professions. AMD launched the world’s first server platform designed specifically for cloud and hyperscale data centers, featuring the industry’s lowest power-per-core x86 server processor. Acer, Dell, HP, and Supermicro all announced plans to adopt the Opteron 4000 Series for their product offerings.

AMD expects revenue to be up seasonally for the third quarter. It is currently trading around $7 with market cap of about $5 billion. It hit a 52-week high of $9.95 on December 24.

Intel’s Chips Lack Support for OpenCL

Apple was rumored to be interested in AMD chips and has started shipping all laptops with GPUs that support OpenCL. The lack of support for OpenCL in Intel’s hybrid chip means that AMD has a fair chance of winning Apple’s business. Apple uses AMD’s ATI Radeon graphics in some of its Mac products, but it has never used its CPUs. Will Apple choose AMD’s Fusion chips over NVIDIA’s GPUs? From what we know of Apple, it likes integrated, miniaturized electronics and packs a lot of punch in small form factors. If that trend is any indication, the standalone GPU may also fall by the wayside.