Advanced Micro Devices (NASDAQ:AMD) took NVIDIA (NASDAQ:NVDA) by storm in the first calendar quarter of 2020, clocking nice market share growth in the discrete graphics cards space thanks to a couple of solid products that were launched last year.

AMD took advantage of its advanced manufacturing process to eat into NVIDIA's graphics processing unit (GPU) dominance. But there's a chance that NVIDIA may be able to make a comeback thanks to a few solid reasons. Let's take a look.

Graphics cards stacked together.

Image source: Getty Images.

NVIDIA has a huge installed base waiting to upgrade

NVIDIA claims that more than 200 million gamers use its GeForce platform, which includes discrete PC GPUs, laptop GPUs, and GeForce Now cloud gaming service. Though NVIDIA doesn't break down the numbers for these three segments, the majority are likely using PCs and laptops with NVIDIA GPUs, as GeForce Now had just over 1 million subscribers at the beginning of the year.

At the same time, a big chunk of NVIDIA's GeForce consumer graphics cards users run older-generation cards, according to data revealed by NVIDIA at its investor day presentation in March 2019. At that time, the company had pointed out that just 2% of its entire installed base was running the latest Turing graphics cards.

In fact, more than 90% of NVIDIA customers were on a GPU whose performance was below GTX 1660Ti levels. The 1660Ti is a Turing-based midrange graphics card that packs the latest ray-tracing technology and is considered a capable and future-proof chip given its pricing and the technology that it packs.

However, a Bank of America Securities survey reveals that just 8.4% of Steam subscribers using an NVIDIA graphics card are equipped to run graphics-intensive PC games that are expected to hit the market later this year. BofA Securities used NVIDIA's 2060 Super graphics card as the benchmark for this survey. When compared to the GTX 1660Ti, the RTX 2060 Super is significantly better at gaming, according to UserBenchmark.

As a result, a nice chunk of NVIDIA's installed user base can be expected to upgrade to the Turing graphics cards to bridge the performance gap that may arise when next-generation games are launched. This should lead to an uptick in the average selling prices of NVIDIA's cards, along with a bump in shipments, paving the way for further growth in the gaming business.

History on its side

A look at past trends indicates that NVIDIA has historically benefited from the advent of graphics-intensive games and a generational leap in GPU architecture. At its 2017 investor day, NVIDIA had revealed that the majority of its installed base was on the older Maxwell and other legacy architecture. The Pascal GPUs, which were launched in 2016, accounted for a small portion of its overall installed base at that time.

Chart showing NVIDIA's installed base of Pascal GPUs.

The majority of NVIDIA's graphics cards were based on older architectures at the beginning of 2017, a few months after Pascal's launch. Image source: NVIDIA.

At the end of 2018, Pascal-based graphics cards accounted for half of its installed base as users upgraded. Not surprisingly, NVIDIA's gaming revenue tripled in the space of four years at the end of fiscal 2019. What's more, the company points out that the average selling price of its graphics cards increased at a compound annual growth rate (CAGR) of 14% over a five-year period, along with an identical rise in units shipped.

This is an indicator of NVIDIA's pricing power in the GPU market, which has allowed it to raise the bar in recent times. Don't be surprised to see NVIDIA maintain this strategy, as it is reportedly on the verge of launching its next-generation Ampere graphics cards.

The Ampere GPUs could deliver a nice bump in performance and power efficiency because they are expected to be based on a 7-nanometer manufacturing process, versus Turing's 12-nanometer architecture. Earlier this year, Taipei Times (via Tom's Hardware) reported that the Ampere cards could be 50% faster than Turing-based cards and slash power consumption in half.

Now, AMD had beaten NVIDIA to the 7-nanometer platform and reaped the benefits, as its recent market share gains tell us. But NVIDIA is all set to close that gap: Recent reports suggest that its Ampere consumer cards are expected to go into mass production in August.

So it appears NVIDIA's video gaming segment -- which produced 43% of its total revenue in the fiscal first quarter thanks to annual top-line growth of 27% -- could grow at a faster pace over the next few quarters due to the tailwinds discussed above. That makes it one of the top stocks to take advantage of the video gaming industry's growth.