NVIDIA Corporation (NASDAQ:NVDA) could continue to deliver strong performance helped by its gaming segment.
Three years ago, if you had invested $100 in Santa Clara, California-based NVIDIA Corporation (NASDAQ:NVDA) stock, today you would be sitting on a massive profit of $973. This bullish rally in NVIDIA stock is driven by several factors, including strong revenue and profit growth, declining risk, huge growth opportunities and the overall bullish sentiment in the market. Of course, this massive rally has raised questions about company's valuation multiples. However, there are several reasons to indicate that NVIDIA stock could still go up from here. Analysts are betting heavily on NVIDIA's AI prospects. However, with AI still in the nascent stage, the gaming segment will remain an important growth driver in the coming quarters.
Gaming segment continues to deliver for NVIDIA Corporation.
Helped by gaming business, NVIDIA topped the Wall Street estimates once again. Gaming is NVIDIA's largest part of its portfolio. In the third quarter, the gaming segment revenue came in at $1.5 billion, contributing 57.5% of NVIDIA's total revenue. This segment has continued to show strong growth over the past few quarters. The gaming segment had disappointed a bit in the second quarter, but was back in the third quarter, with the segment revenue going up by 25.4%. Sequentially, the gaming segment revenue was up 59%. In the first nine months, this segment revenue is up 39%.
Record GeForce GPU gaming revenue of $1.56 billion was led by the continued strong adoption of Pascal based GeForce GTX gaming platforms. NVIDIA's GeForce continues to remain the most popular GPU brand among gamers. Secular growth from eSports and new AAA gaming titles boosted demand for the Pascal-based GeForce GTX10.
NVIDIA is also looking to expand its customer base by bringing its offering to MacOs. In the first half of the year, NVIDIA launched Pascal-based eGPU (external GPU) for Apple's Mac users to give them the gaming experience of Pascal. NVIDIA is also planning to launch its Cloud gaming service GeForce Now on MacOS, which would enable Mac users to experience GTX 1080 without investing in hardware. Gaming segment revenues were also boosted by demand from cryptocurrency miners. In the second quarter, GPU-demand from cryptocurrency miners had added over $150 million to the company's top line.
Nintendo Switch has been a boon to NVIDIA.
One major driver for NVIDIA's gaming business has been the partnership with Nintendo. A custom version of NVIDIA's Tegra X1 SoC (system on chip) powers Nintendo's Switch console. Since its launch Switch has continued to deliver strong sales. According to NPD Group, Switch was America's best-selling console in September, making it the top-selling video game device for three consecutive months. It is the top-selling platform in five out of the seven months since its March release.
Nintendo sold 4.89 million Switch consoles during the six-month period ending in September. This has directly reflected in NVIDIA's revenues. In the second quarter, Tegra sales surged 101% annually, fueled by an 800% jump in revenue from gaming platforms and services (like the Switch) and a 19% jump in automotive revenues. Nintendo expects the strong demand for its Switch console to last through the holiday quarter. RBC Capital Markets analyst Mitch Steves expects sales of Switch SoCs to boost NVIDIA's fiscal 2018 revenues by up to $400 million.
AMD a threat to NVIDIA corporation?
Early this year, there were reports of AMD (NASDAQ:AMD) eating into NVIDIA's market share. Jon Peddie research estimated AMD had picked up a few percent of market share over NVIDIA in the second quarter. AMD’s discrete GPU market share rose from 27.5% in Q1-17 to 29.4% in Q2, on the other hand, NVIDIA’s share fell from 72.5% to 70.6% during that period. AMD now has a stronger presence in the high-end graphics-card market with Vega. AMD launched Vega 56 and Vega 64 in August, which is competitive with NVIDIA’s GTX 1080. To counter AMD, NVIDIA has introduced a Ti version of GTX 1070 that stands between GTX 1080 and 1070 in all aspects from price to performance.
The fourth quarter features four blockbuster game releases in Destiny 2, Call of Duty: World War II, Star Wars: Battlefront 2, and Assassin's Creed: Origins. This is where NVIDIA's new 1070 Ti card could make a difference. Gamers who want to play these games on 4K resolution screen at smooth 60-plus frames per second will need a graphics card more powerful than what's available at the mid-tier offering. The 1070 Ti, which will be priced at $450, looks like a great choice for gamers who can't afford to spend more than $500 for a Vega 64 or GeForce 1080, but want that extra performance to play the latest games at higher graphics settings.
Gaming will remain a significant growth driver For NVIDIA stock.
A lot of bullish commentary around NVIDIA stock is due to the opportunities from AI, which is still in a nascent stage. While the AI business will continue to grow, gaming will remain the main driver for the next few quarters, given its contribution to NVIDIA's overall revenue. John Peddie Research expects the PC gaming market to grow at a CAGR of 6% from over the next three years, implying a market value of $36 billion in 2019. The strong growth in eSports and demand for VR gaming will also be a big positive for NVIDIA. eSports is now as popular as sports streaming giant ESPN. In an interview with Venture Beat, NVIDIA CEO Jensen Huang remarked that "I happen to believe that video games will be the largest sport and entertainment in the world. There are hundreds of millions of gamers today. I believe there will be billions. It’s a great opportunity. I believe the market for video games will continue to grow. I also believe the technology will evolve and advance. "
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