Strong demand for NVIDIA's (NASDAQ:NVDA) graphics processing units (GPUs) has led to terrific growth in its video gaming business, thanks in no small part to the company's dominance in the discrete GPU space. John Peddie Research, which pegs NVIDIA's market share at 72.5%, singled out the gaming PC segment and its higher-end GPUs as a "bright spot" in the first quarter. 

Jon Peddie Research estimates that high-end systems accounted for 43% of the gaming market last year, followed by midrange systems that had a 35% share. This clearly indicates that gamers are more inclined toward more powerful GPUs that have higher selling prices and margins.

NVIDIA's GeForce gaming processor sales have jumped at an annual pace of 11% over the past five years, along with a 12% jump in average selling prices. But despite the company's success in the higher end of the market, it recently launched a budget GPU that costs just one-tenth what its $699 flagship product costs.

An NVIDIA GPU.

Image source: NVIDIA.

Why is NVIDIA going low?

The recently launched GT 1030 graphics card is priced at just $69.99. This is a bare-bones GPU, with just 2 gigabytes of memory, compared with the flagship GTX 1080 Ti's 11 GB of memory. But why does NVIDIA want to compete in the low end of the market that accounts for just an estimated 22% of PC gaming systems, while also taking on the risk of hurting its margin?

The answer lies in the growing popularity of esports, which makes video games into a spectator sport in which professional gamers form teams to compete against each other. Viewers can watch esports competitions online or on big screens installed at video-gaming arenas. Esports games belong to genres such as first-person shooter, real-time strategy, or multiplayer online battle arena, which aren't too demanding as far as graphics requirements are concerned.

For instance, the highly popular League of Legends' recommended system requirements suggest that the game needs a GPU with 512 MB of video memory at minimum. The game's developers say the NVIDIA GeForce 8800 is good enough to play this game. That GPU has just 512 MB of memory, so NVIDIA's new graphics card is capable of running League of Legends, especially considering it has identical processing power and is based on a newer architecture.

NVIDIA has made a smart move by launching a budget graphics card that will work for games that should grow in popularity as esports grows. Newzoo estimates there are 191 million people who watch esports once a month or participate in an amateur esports league, as well as 194 million people who watch esports less than once a month. 

Can it succeed against AMD?

NVIDIA has decided to undercut rival Advanced Micro Devices' (NASDAQ:AMD) Radeon RX 550 GPU by pricing the GT 1030 a full $10 cheaper. However, the NVIDIA card's specs don't appear to be as strong as AMD's on paper.

For instance, the RX 550 GPU has higher bandwidth memory and faster memory speed than the GT 1030, while the latter counts a higher operating speed in its favor. But a test by a user who posted on Reddit indicates that the GT 1030 can perform faster than the RX 550 if games such as Overwatch and GTA V are played at their highest settings.

Therefore, it won't be surprising if NVIDIA wins the battle of the budget GPUs against AMD, thanks to a better real-world performance and aggressive pricing. What's more, NVIDIA might bring out a more powerful version of the GT 1030 with 4 GB of memory, boosting its performance and acceptance in the budget end of the market.

The takeaway

AMD has been swiftly cutting into NVIDIA's stronghold, increasing its market share from 21.6% in 2015 to 29.5% in 2016 thanks to its value-for-money offerings. Therefore, NVIDIA might have made a smart move by bringing out a budget GPU to gain access to more gamers, thereby increasing its chances of defending its lead in this space.

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