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NVIDIA: Cashing In on the Games People Play


Jen-Hsun Huang's experience as chief executive of graphics-chip superstar NVIDIA Corp. (NVDA) reads like a motto of the hit TV show Survivor: Outwit. Outlast. Outplay. In an industry where the word cutthroat is an understatement, Huang's company has bested virtually all rivals in developing the innovative chips that bring high-quality, Hollywood-style 3D images to computers, game consoles, and set-top boxes. Says Huang, 37: "Our business is on fire because we've got the competitive spirit to create better products faster than anyone out there."

Indeed, since 1997 the company has churned out a string of best-selling graphics-processing chips. Although the semiconductor industry is notoriously cyclical, NVIDIA has benefited from steadily increasing demand by savvy gamers eager for its sophisticated graphics processors. Along the way, a slew of lesser graphics chipmakers has folded, leaving NVIDIA with only two serious rivals, ATI Technologies Inc. (ATYT) and Intel Corp. (INTC) Says market analyst Peter Labe at Buckingham Research: "Five years ago, we talked about 8 to 10 competitors. But today there are only two, because NVIDIA's pushed out the small fry by delivering on-time products that offer great performance."

PING-PONG PROWESS. The big news for NVIDIA, No. 17 on the Hot Growth ranking, is that Microsoft Corp. (MSFT) has asked it to develop the core of its new game console, the hotly awaited Xbox. NVIDIA's GeForce chip, which forms the console's core, uses more than 30 million transistors--a design more complex than Intel's new Pentium 4 chip. Xbox' success could give NVIDIA a huge share of the $11 billion computer-game business.

NVIDIA's road to stardom hasn't been all fun and games. In fact, Huang, a Stanford University-trained engineer born in Taiwan, isn't even a gamer. But as a child--he came to the U.S. when he was 10--he was, say those who know him, a top-notch ping-pong player. He became interested in the business only when NVIDIA's other co-founders, Chris A. Malachowsky, now vice-president of hardware engineering, and Curtis R. Priem, chief technical officer, persuaded him to join in the new venture. Before that he worked at chipmaker LSI Logic Corp. Huang says that NVIDIA's feature-laden first chip flopped in 1995 because of poor performance.

The company regrouped with a new graphics processor two years later and hasn't looked back. Revenues were only $29 million in 1997 but have grown at a 187% average annual clip over the past three years. For the most recent 12 months, revenues rose to $735.3 million. By the end of this fiscal year, in January, 2002, they're projected to top $1.1 billion, or $924,000 per employee, more than double the industry average. Profits have grown by an average 392% over the past three years, to $99.9 million.

TOP ENGINEERS. It will be hard for rivals to elbow NVIDIA out of its position. Analysts say newcomers can't afford the $75 million needed to design similar chips. Even if they could, NVIDIA has hired most of the best engineers in the field. Intel and ATI are fighting back by cutting prices, but NVIDIA matched them by renegotiating a deal with one of its largest contract manufacturers.

NVIDIA has also set its sights on growth opportunities outside gaming. By next year, it is expected to grab more than 60% of the desktop computer market, according to Buckingham Research, up from 48% today. That will pit it even more directly against Intel, which dominates that low-end graphics-processor market. Huang says he will also seek to expand NVIDIA's reach into high-end notebooks and other computers, where Intel isn't nearly as strong.

Huang boldly predicts that NVIDIA will prevail. "The strong will get stronger," he says. Of course, NVIDIA could stumble as PC sales weaken. That might knock its thinly traded, high-priced stock--about $80 a share--for a loop. But barring a total PC collapse, this is one company that seems to be at the top of its game. By Cliff Edwards in Santa Clara, Calif.


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