Nintendo's (NTDOY 0.62%) stock recently hit a 52-week high after its six-month earnings report impressed investors with robust top revenue growth. Its revenue rose 14% annually to 443.97 billion yen ($4.1 billion), thanks to a 33% jump in Switch revenue.
Its total Switch shipments surged 37% to 6.93 million units as shipments of the new Switch Lite offset a 2% dip in shipments of full-size Switches. Nintendo also stated that it had shipped 41.7 million Switch consoles since its launch in March 2017.
That's great news for Nintendo, but is it also a big catalyst for NVIDIA (NVDA 1.44%), which supplies a crucial chip for the Switch and Switch Lite?
Why is NVIDIA a Nintendo supplier?
NVIDIA's Tegra SoCs (system on chips) combine an ARM-based CPU, a GPU, and other components into a single module. NVIDIA originally tried to sell its Tegra SoCs to smartphone makers, but it lost that market to Qualcomm.
But instead of abandoning the Tegra, NVIDIA pivoted the chipset toward connected cars, driverless computers, gaming tablets, and set-top boxes. It also showcased its latest Tegra chips in its Shield devices over the past six years, and its robust gaming performance in the Shield tablet and set-top box convinced Nintendo to install the Tegra in the Switch -- which seamlessly "switches" between handheld and home console modes.
That was a major victory against AMD (AMD 0.13%), which produces the core chipsets for Sony's (SONY 1.50%) PS4 and Microsoft's (MSFT 1.50%) Xbox One. AMD's APUs (accelerated processing units) -- which also merge a CPU and GPU -- are beefier, but aren't optimized for handheld gaming devices.
How much revenue does NVIDIA generate from Nintendo?
NVIDIA's Tegra revenue rose from $1.53 billion in fiscal 2018 to $1.54 billion in 2019. But in the first half of fiscal 2020 (which started on Jan. 30 and ended on July 28), its Tegra revenue fell 26% annually to $673 million, mainly due to lower SoC sales for the Switch. NVIDIA generates most of its Tegra revenue from Nintendo and automakers, and the rest from makers of drones, robots, edge computing gadgets, and other devices.
NVIDIA reports its automotive revenue separately, so by subtracting that total from its total Tegra revenue -- and assuming that Nintendo generates most of the remaining revenue -- we can assume that the Japanese video giant accounted for 5%-10% of NVIDIA's total revenue since the Switch's launch.
NVIDIA notes that no single customer accounted for over 10% of its total revenue in 2018, 2019, and the first half of 2020. Therefore, it's likely that Nintendo remains a major customer and accounts for a high single-digit percentage of NVIDIA's total revenue.
Investors should mind the unknowns
It's easy for investors to assume that robust Switch sales will boost NVIDIA's Tegra revenue. However, NVIDIA's Tegra sales declined in the first half of the year as Nintendo's Switch sales rose. Moreover, stronger sales of Tegra chips for cars offset softer sales of gaming SoCs for the Switch during that period.
Therefore, it's likely that Nintendo already accumulated a large supply of Tegra X1 chips and isn't placing new orders from NVIDIA every quarter -- so we shouldn't assume that strong Switch sales immediately generate growth for NVIDIA's Tegra business. Nonetheless, the Switch Lite's impressive launch remains a long-term tailwind for NVIDIA, since it points toward robust holiday sales and additional growth in 2020.
Nintendo is also rumored to be developing a higher-end "Switch Pro" to counter the PS5 and next-gen Xbox next year, and it might be powered by a new Tegra-based SoC. But for now investors should pay closer attention to the health of NVIDIA's core gaming GPU business when the chipmaker reports its third-quarter earnings on Nov. 14.