NVIDIA (NASDAQ:NVDA) has enamored investors and analysts alike with its forays into hot trends like artificial intelligence (AI) and self-driving cars. But video gaming remains its biggest money spinner. The graphics processing unit (GPU) specialist delivered massive top- and bottom-line growth in the first quarter of fiscal 2019, primarily driven by a 67% year-over-year jump in the video gaming business, which accounts for over half its revenue.

Chart showing growth in NVIDIA's gaming revenue.

Data from NVIDIA. Chart by author.

NVIDIA's core business of selling GPUs to PC gamers has grown remarkably, even as PC sales have been declining for six years now. This success is thanks to the fact that NVIDIA has captured the lion's share of the discrete GPU market. And given the trends prevalent in this industry, NVIDIA isn't going to relinquish its crown anytime soon.

Playing the bigger game

Jon Peddie Research estimates that NVIDIA commanded 66.3% of the discrete GPU market at the end of 2017. The chipmaker was in a better position the year before, but rival Advanced Micro Devices took advantage of demand in cryptocurrency mining to boost its position.

NVIDIA has stuck to its policy of serving gamers first. In fact, it had directed retailers earlier this year to restrict sales to crypto miners to help restrain price gouging. This is probably why its market share fell last year as AMD rushed in to fulfill crypto-driven GPU demand. But NVIDIA knows that cryptocurrency won't be a long-term catalyst for the GPU market.

Consider this: A total of 2.1 billion GPUs were shipped in 2017, 17% of which were used in PCs and workstations. In all, PCs consumed 357 million GPUs last year (including integrated graphics cards), and just 3 million of these were bought for mining cryptocurrency. NVIDIA has done the right thing by focusing on its core consumer base, which should eventually allow it to increase its GPU market share as PC gaming will keep growing for a long time.

NVIDIA's GTX 1080 graphics card.

Image Source: NVIDIA. 

Why GPU growth won't be cooling off soon

PC gaming is here to stay, as is the demand for PC gaming hardware. Digi-Capital forecasts that sales of PC gaming hardware could jump from an estimated $30 billion to $35 billion in 2018 to nearly $45 billion in 2022. This isn't surprising, as 60% of developers prefer to develop titles for the PC platform, as compared to around 30% for mobile and console platforms.

These developers are usually creating games that are more resource-heavy, requiring powerful hardware to deliver an immersive experience to the gamer. For instance, the battle royale game genre that drove NVIDIA's sales last month can only be run using a dedicated graphics card.

Similarly, marquee video games from major studios -- typically known as AAA games -- are getting more graphics-intensive with each passing generation. These AAA games require high-end GPUs to run smoothly (the user will have to lower the settings to run them on an older-generation graphics card). Not surprisingly, over 40% of the PC gaming systems sold are the high-end variety.

Anyone with a budget graphics card will eventually have to shell out big bucks for better hardware as the market moves toward more-advanced, resource-hungry games. This is great news for NVIDIA, as 35% of its installed base is currently using the GPUs based on the 2-year-old Pascal architecture. The chipmaker is reportedly gearing up to launch its next-gen GPUs in July, so it could enjoy a strong upgrade cycle once these hit the market. And the average age of gamers has increased, meaning NVIDIA's customers likely have more money to spend.

NVIDIA will stay ahead of the competition

NVIDIA's lead in the discrete GPU space will help boost it in the long run as integrated GPUs aren't going to cut it when it comes to playing resource-hungry games. This is why the joint efforts of the likes of AMD and Intel might not be enough to stop NVIDIA's juggernaut.

The two companies had struck a deal last year to fuse AMD's Vega GPU onto Intel's central processing units, but their chip didn't turn out to be powerful enough to replace a dedicated GPU. Meanwhile, AMD's much-hyped Vega graphics cards that were released last year weren't good enough when compared to NVIDIA's older generation graphics cards.

So NVIDIA's GPU dominance paves the way for it to take advantage of the growth in PC gaming hardware, and to sustain the terrific momentum of its video gaming business.

Harsh Chauhan 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.