Esports, social media, and game streaming have been a major boon for the $138 billion gaming industry, especially for NVIDIA (NVDA +0.64%), the top provider of graphics processing units (GPUs) for PC gamers.
The gaming segment is NVIDIA's biggest growth driver, making up 56.5% of trailing 12-month revenue, and it isn't slowing down. NVIDIA's gaming revenue exploded 162% between fiscal 2015 and fiscal 2018 (which ends in January), as gamers have upgraded to more powerful GPUs in order to play the latest cinematic games at high screen resolutions and compete online with other players.
Based on some recent industry data, investors should expect the good times to keep rolling for NVIDIA's gaming business.
NVIDIA GeForce GTX 1080 graphics card. IMAGE SOURCE: NVIDIA.
Gaming boom lifting all boats
In recent quarters, demand for graphics cards among PC gamers hasn't been a zero-sum game, which is indicative of an expanding PC gamer base, driving higher GPU demand for both AMD and NVIDIA.
In late April, Advanced Micro Devices' (AMD +0.84%) first quarter earnings report revealed a whopping 95% growth rate in its computer and graphics segment. A few weeks later, NVIDIA showed that Team Red's gains were not coming at the expense of Team Green, with NVIDIA's gaming segment surging 68% year over year, consistent with recent quarters.
Under CEO Lisa Su, AMD has made a comeback in the discrete GPU market. Jon Peddie's latest research report for the first quarter showed AMD's share of the add-in board market rising to 34.9% compared to 27.5% a year ago. But after NVIDIA saw its market share drop from a high of 72.5% last year, it seems to be stabilizing in the mid-60% range over the last few quarters.
However, Jon Peddie attributes AMD's recent gains to new products for workstations and crypto demand, as opposed to gaming, which indicates NVIDIA is still in a great position with its line of GeForce graphics cards.
Gamers are starting to upgrade to high-end cards
The monthly Steam hardware survey shows gamers not only sticking with NVIDIA over its rival, but starting to trade up to pricier cards. For non-gamers out there, Steam is the most popular online store where PC gamers buy and download games. Every month it takes a survey to find out which hardware its users are running in their PC.
Consistent with Jon Peddie's market share data, NVIDIA GPUs crowd the top of Steam's June 2018 survey of video card usage. Mid-tier cards like NVIDIA's GeForce GTX 1060 and 1050 Ti are at the very top, but the percentage of users have been declining a few percent each month recently.
| GPU | February | March | April | May | June |
|---|---|---|---|---|---|
| GeForce GTX 1060 | 14.27% | 13.89% | 12.29% | 12.32% | 12.74% |
| GeForce GTX 1050 Ti | 11.66% | 11.07% | 8.60% | 8.35% | 8.51% |
| GeForce 1070 | 1.80% | 2.58% | 3.69% | 3.86% | 3.84% |
| GeForce 1080 | 1.05% | 1.51% | 2.23% | 2.37% | 2.43% |
| GeForce 1080 Ti | 0.47% | 0.75% | 1.17% | 1.22% | 1.27% |
Data source: Steam.
Meanwhile, high-end NVIDIA cards like the GeForce GTX 1070, 1080, and 1080 Ti have seen their usage increase a few percentage points in recent months. This indicates gamers are upgrading from mid-tier cards to high-end cards, which generate higher gross margins for NVIDIA.
In fiscal 2018, NVIDIA saw its gross margin expand 100 basis points to 60.2%, as demand for higher margin products like gaming cards continued to surge. In the first quarter, continued strong demand in the gaming segment contributed to a 510 basis point expansion over the year ago quarter.
The GTX 1060 is about a $300 card while the 1080 has been in the $500 to $600 range lately. As gamers upgrade, NVIDIA's average selling prices will likely continue increasing, consistent with its 11% annual increase the company has experienced over the last five years.
And there's still a lot of gamers out there who haven't upgraded. Only 30% of NVIDIA's installed base have upgraded to the latest Pascal generation of GeForce GPUs, like the ones mentioned above. More gamers will eventually upgrade, especially with 4K resolution gaming becoming more mainstream, requiring more powerful cards.
GeForce demand should remain robust
NVIDIA looks poised to remain the card of choice for gamers through the end of this year. The company recently reported that active weekly users for GeForce GPUs increased 10 million over the last 8 months, which the company called a "massive increase."
The total installed base of GeForce gamers is about 100 million, which would make GeForce the most popular gaming platform, even way ahead of Sony's Playstation 4 game system, which has a base of 79 million.
One of the benefits of being the market share leader is that game companies are developing games to be optimized for NVIDIA's GPUs. It's clear that NVIDIA is the gold standard in the space, 86% of esports gamers compete using NVIDIA hardware.
NVIDIA has controlled the majority of the discrete GPU market since the March quarter of 2005, and recent trends indicate that streak isn't going to end any time soon.
