NVIDIA'S

Microsoft

Intel

Now Nvidia's best growth seems behind it. In 2006 a struggling ATI was chased into the arms of Advanced Micro Devices, which, like Intel, makes central processors. In recent months Nvidia's market share has eroded. In the final quarter of 2007 it captured 31.8% of graphics chip sales, a 2.1 percentage point drop from the third quarter, according to Jon Peddie Research, a market watcher. AMD's share climbed 3.7 percentage points to 22.8%. Intel's increased 3.1 points to 41.1%.

This column first highlighted Nvidia stock in March 2003 when it fetched less than $5. It peaked above $35 last October. Now it's $19 and change. Over the past six months it has underperformed Intel and the broad market by more than 30 percentage points. (AMD, lately reduced to a punching bag for Intel in its central processor business, has done worse.)

Nvidia shares at least seem comfortingly cheap, at 11 times forecast earnings for this fiscal year, which runs through January 2009. But the price reflects some grave challenges facing the company.

Had you popped open the case of a home computer a decade ago, you would have likely seen a roomy cavern populated with easily identifiable components. Upgrading your central processor, graphics processor or memory was as easy as pulling that item off the motherboard and sliding the new one on. Such upgrades were needed often; every couple of years a new program or game appeared that required more power.

Today the games are increasingly played on separate consoles, and many of the programs draw their computing power from unseen machines accessible by the Internet, so periodic power gains aren't as important. Many desktop machines have been replaced by laptops, or else by all-in-one desktop units that are built using laptop platforms. Graphics cards aren't easy to replace. In many cases they're hard-wired onto the motherboard, along with Internet connectivity components, by the same company that makes the central processor. Such integrated systems, made popular by the success of the Centrino platform introduced by Intel in 2003, carry three advantages over machines with discrete components. The parts play nice together, since they're made, or at least installed, by a single company. Systems can be made to consume far less power. They're also cheaper.

That corresponds with how most people use their computers. No one's calculating pi to the quadrillionth decimal place on their home machine, but many of us tote it into the living room with our morning coffee to read the news and send a few emails. And so the speed of processors in some of the most popular computers merely matches, or even falls short of, speeds achievable several years ago, while battery life and Internet connectivity speeds have increased sharply. This has left Nvidia with a surplus of computing power, scrambling for a more-efficient way to package it.

Let's not overstate the case. Anyone who plays games or edits video on their computer will still want the power that can only be found in a discrete chip. And Nvidia makes motherboards with integrated graphics. It just can't incorporate the central processor to make it a complete package. Also, today's mobile devices, particularly phones, want to perform graphics stunts, too, and Nvdia makes chips for these that have impressed Wall Street analysts of late. Some see phones as the company's next big source of growth. Handsets, though, made for just 2% of Nvidia's sales in its last fiscal year. And whatever the company's ability to render "Shrek" in high definition on your phone, it will be years before phone companies can deliver the download to you without tethering you to a computer.

Financial targets for Nvidia are modest. It's seen delivering single-digit profit growth this year and next. Over its past four quarters it has delivered more profit than expected, and it has done so with a relatively lean amount of factories, equipment and other costly resources. That helped earn the company a spot recently on our Efficiency Experts screen, along with seven other survivors. See our screen recipe for details on all the demands, and run the search yourself using SmartMoney's stock screener.