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Leading visual computing technologies and graphic chip manufacturing company, NVIDIA Corporation (NVDA) recently declared its intention of acquiring U.K-based data-modem chip manufacturer Icera Inc. for $367 million in cash.

This acquisition is expected to enhance the company’s Tegra processing chips, and provide the much-needed competitive edge over its prime competitor Qualcomm Inc., (QCOM), which already provides both processing and modem chips for portable devices.

NVIDIA also expects this acquisition to help it enter the competitive baseband or radio chips market, which connect devices to cellular networks. Moreover, the company believes this collaboration will be beneficial for end-users, which is expected to result in a much faster roll out of smartphones in the market, thereby boosting revenue going forward.

Once the news of the acquisition broke in the morning, shares of NVDIA rose 25 cents to $19.57 in early trading.

Although NVIDIA is more focused on the gaming industry, it is also diversifying its operations in the computing space, which is becoming increasingly interconnected with radio chips and other cellular devices. We believe this will be beneficial for the company. Software application is rampant on devices, which are remotely located and are connected through a wireless network. 

Moreover, operating systems such as Windows Vista and the newly launched Windows 7 require higher graphics resources compared to its predecessor as it leverages improved graphics capabilities to enhance user experience. This will in turn boost the demand for graphics cards.

However, on the flipside, NVIDIA might face challenges in the baseband chip business given industry giant Texas Instruments (TXN) terminated its baseband chip operations, because of constant pricing pressure, and also to concentrate more on the profitable application processor business.

Moreover, NVIDIA believes the new acquisition will temporarily impact operating profit in the first half of 2012, but expects the transaction to be accretive in the second half as the company will be able to strengthen its foothold in the growing mobile computing market.

NVIDIA is optimistic regarding its long-term growth given the gradual recovery in the demand for graphic chips. The company has rolled out the first quad-core mobile processor. The company also entered into a six-year licensing agreement with Intel Corp. (INTC) worth $1.5 billion. However, NVIDIA’s performance may be slightly tempered by the economic slowdown in Europe and increased competition.

Currently, NVDA holds a Zacks #3 Rank, implying a short-term Hold rating.

 
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