"IBM is no longer going to produce the bridge chip needed for Nvidia to have an AGP part," said Chris Caso, an analyst with Friedman, Billings, Ramsey Group Inc. (Arlington, Vir.), in a report. "Our checks indicate that IBM has notified Nvidia it would no longer be able to produce the 'bridge chip' that provides the AGP interface on Nvidia's low-end graphics cards."

For some time, IBM reportedly manufactured the "bridge chip" on a foundry basis for Nvidia's low-end graphics cards. Compared to PCI, the accelerated graphics port (AGP) specification defines an optimized path for moving data between the graphics subsystem, processor and memory, according to Nvidia (Santa Clara, Calif.).

Graphics-chip maker Nvidia is expected to find another foundry partner for the bridge chip, but "we believe that this has the likelihood of creating a supply chain disruption during the summer," he added. "We think AGP interface systems will still represent a sizeable portion of the market, since Intel has flooded the market with AGP-based 865 chipsets."

There are other issues for Nvidia as well. "We are trimming estimates on Nvidia due to inventory accumulation, the emergence of aggressive pricing, and the prospects of slow business conditions in July," Caso said. "Nvidia still retains a competitive advantage vs. ATI, [but] this advantage is not enough to escape the presently slow business conditions."

Nvidia's inventories were up 36 percent — or 19 days — in its fiscal first quarter, as compared to the previous quarter. And Nvidia is offering deep discounts by "bundling" a high-end 7800 graphics chip "with one or more 6000 series products," according to the analyst.

The analyst, in turn, has lowered his forecast for Nvidia to an EPS of $0.27 per share on sales of $675 million in the July quarter, compared to consensus of $0.28 a share on sales of $678 million.

"We note that we do expect some margin benefit during the October quarter, due to initial [Sony-made Playstation 3] game consoles, for which Nvidia enjoys a royalty stream," he added.