NVIDIA Expects Its Gaming Business to Get Even Bigger

Although graphics-specialist NVIDIA (NASDAQ: NVDA) has become something of a tech darling because of its exposure to a number of compelling, buzzword-compliant markets such as artificial-intelligence processing and self-driving cars, the company’s largest business is its gaming business. During NVIDIA’s most recent fiscal year, the company raked in $5.51 billion in gaming revenue, with around $4.6 billion of that coming from graphics cards for personal computer (PC) gaming. The remainder came from shipments of game-console chips.

Image source: NVIDIA.

Revenue from NVIDIA’s gaming business made up more than 67% of the company’s total sales during fiscal year 2018, so it’s important for current and potential investors in NVIDIA stock to understand that gaming still is a huge part of NVIDIA’s business, even though the narratives around data centers and self-driving cars might arguably sound more exciting.

NVIDIA seems confident that the revenue that it generates from selling graphics processors into the PC gaming market will continue to grow, fueled by two key factors. The first one is that graphics-processor shipments are simply growing. PC gaming is becoming more popular, which certainly helps the unit shipment growth story.

The second factor is that the average selling prices of the graphics cards that NVIDIA sells into the gaming market are growing. Let’s take a closer look at this phenomenon and the drivers behind it.

Steady average selling price growth

NVIDIA says that over the last five years, the compounded annual growth rate (CAGR) of its gaming-oriented graphics card average selling prices has been 11%. During each product generation, NVIDIA will introduce a broad set of graphics processors at a wide range of price points. Today’s lowest-end GeForce GTX 1050 graphics cards sell for around $140, and the highest-end GeForce GTX 1080 Ti cards sell for between $700 and $800, and there are a lot of different cards in between those two.

The idea, then, is that over the generations, gamers have increasingly gravitated toward higher-end parts in NVIDIA’s product stack. The company says that during its fiscal year 2015, the average GeForce graphics card selling price was around $160, and that figure rose to $200 during fiscal year 2018.

NVIDIA’s explanation for this phenomenon is simple: Computer games are requiring more horsepower to deliver the kind of graphical experience that the developers of those games intend. The most graphically demanding games incorporate increasingly realistic lighting and shadowing effects, more complex worlds, more realistically rendered characters, and much more.

The company also does its part to try to encourage game developers to use increasingly advanced rendering effects by developing these effects itself and allowing game developers to incorporate those effects into their games. This is called NVIDIA’s GameWorks technology.

Although GameWorks has sometimes been criticized for being relatively inefficient, it’s not hard to understand NVIDIA’s motivations here: It has a vested interest in making sure that as many games as possible incorporate advanced rendering techniques so that gamers see value in upgrading their existing graphics cards. When they do, they’re encouraged to buy higher-end parts to get the most out of these games.

Investor takeaway

Ultimately, I don’t think investors should expect the trend of games becoming more graphically demanding to stop anytime soon. Even the best-looking 3D games today don’t look photo-realistic, so there still is a lot of room for game developers to implement increasingly realistic (and computationally expensive) graphics-rendering techniques.

NVIDIA generally updates investors on the compounded annual growth rates for both its gaming graphics processor unit shipments, as well as its average selling prices for those chips each year at its analyst day. We’ll see in about nine months if the trend that NVIDIA is seeing along both vectors is holding, accelerating, or decelerating.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.

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