As shares tumble, Nvidia faces minor meltdown

Nvidia is in the throes of a minor meltdown. Its share price is collapsing as it grapples with widespread product defects, a resurgent Advanced Micro Devices, and a weak market.

It all started when Nvidia released a statement on July 2 saying it would take a $150 million to $200 million charge to cover the costs for repair and replacement of defective graphics silicon in notebook PCs. Though Nvidia didn't name any names, Hewlett-Packard, Apple, and Lenovo, among others, use Nvidia graphics chips in their notebooks.

Then on Thursday, July 3, shares plunged $5.54, or just over 30 percent, and closed at $12.49. And share prices have continued to fall--though how much of the post-30-percent drop can be attributed to the weak stock market is not clear.

"There are two piece of news. One is the technical problem, the other part is that (Nvidia) isn't happy with where their business is going," said Dean McCarron, principal at Cave Creek, Ariz.-based Mercury Research.

Keener-than-usual competition is adding to product-defect woes. "Pricing has been more aggressive," McCarron said, referring to more competitive products from AMD's ATI graphics unit. "They did make some price adjustments on their GPU (graphics processing unit) products based on AMD being more competitive," McCarron said.

PC makers such as HP and Toshiba are also using more AMD-ATI graphics chips in notebook PCs, though the impact of this trend may be felt later rather than sooner. "I wouldn't necessarily look at it as being a tremendous share shift. We won't know until the end of the quarter. My suspicion is that (this quarter) a market share shift could be a small component," he said.

Beyond Nvidia's internal problems and the inter-company rivalry with AMD, McCarron sees a bigger issue looming that may affect not only Nvidia in a big way but AMD and Intel, too. "I am seeing some early signs that the market is weaker than forecast. China in particular seems to be much softer," McCarron said. This is a concern because China is now driving a lot of the growth, he said.

Stateside, an ill-timed Rambus lawsuit against Nvidia falls into the kick-them-when-they're-down category. Rambus, which makes a living--though not that successfully in recent years--suing other companies for patent infringement, has now set its sights on Nvidia. The Los Altos, Calif.-based company filed a lawsuit Thursday claiming Nvidia products with memory controllers for synchronous dynamic random access memory (SDR) and double data rate memory (DDR, DDR2, DDR3, GDDR, and GDDR3) infringe 17 Rambus patents.

But product defects will be the big issue that dogs Nvidia over the summer and weighs on its stock price. Here is an excerpt from Nvidia's 8-K filing with the Securities and Exchange Commission on July 2. "While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs."

McCarron said in some cases "you're getting enough mechanical stress that you're actually breaking the bond between the chip and the motherboard" which can cause a system with an Nvidia chip to fail.