Nvidia (NVDA -3.87%) stock may be down in the dumps in 2022 as Wall Street seems to be worried about the health of the company's video gaming business, but a closer look indicates that the problems are likely to be short-term in nature.
Nvidia's video gaming business could take off big time in the long run as more gamers upgrade to its new graphics cards that are used in personal computers (PCs). At the same time, there is another emerging trend in the video gaming space that could supercharge Nvidia's growth -- cloud gaming, which allows gamers to stream games to their PC, Mac, or smartphones from a remote data center for a fee.
Let's look at the reasons why this could be the next big growth avenue for Nvidia.
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There's a huge opportunity in cloud gaming
The cloud gaming market is estimated to have generated $1.6 billion in revenue last year, according to market research firm Newzoo. The firm also points out that there were an estimated 23.7 million paying users for cloud gaming in 2021.
A few calculations indicate that Nvidia is the biggest player in this nascent, but promising market. The company pointed out at its investor day event last month that its GeForce Now cloud gaming service had 15 million users. So Nvidia controls around 60% of the cloud gaming market, going by Newzoo's estimate of the total number of subscribers that this space had in 2021.
It also seems that Nvidia controls a big chunk of cloud gaming revenue. The company generated $11.4 billion through sales of gaming graphics cards in fiscal 2022 (ended on Jan. 30). For comparison, Nvidia's overall gaming revenue in fiscal 2021 came in at $12.46 billion, indicating that cloud gaming produced just over $1 billion in revenue for the company. Based on Newzoo's estimate of the cloud gaming market's 2021 revenue, calculations indicate that Nvidia has cornered just over 60% revenue share of this budding market.
Now, $1 billion in cloud gaming revenue means that this segment accounted for around 3.7% of Nvidia's top line of $26.9 billion in fiscal 2022. That may look like a small number right now, but it won't be surprising to see the GeForce Now business boom big time in the long run. That's because the cloud gaming market could hit $14 billion in revenue by 2027, clocking a compound annual growth rate of 64% for the next five years.
If Nvidia manages to hold on to its share of this potentially lucrative market, GeForce Now could become an $8 billion-plus business for Nvidia in five years. That's a big number considering the overall revenue generated by Nvidia's gaming business in fiscal 2022. What's more, the size of the cloud gaming market could hit $22 billion by 2030 as per a third-party estimate, indicating that this space could turn out to be a long-term money spinner for Nvidia given its already-dominant position.
Nvidia is pulling the right strings to capitalize on this opportunity
There are a few simple reasons why Nvidia is dominating the cloud gaming market right now.
First, the company has brought high-end gaming to players at an enticing price through its GeForce Now RTX 3080 plan.
With the plan priced at $19.99 per month or $99.99 for six months, gamers are paying a fraction of what they would be spending on building a premium gaming PC powered by the RTX 3080 graphics card that starts at a manufacturer's suggested retail price (MSRP) of $699, though that may not be the case in the real world where graphics card prices are much higher on account of tight supplies.
Second, GeForce Now boasts of a library of more than 1,200 games that is available in 80 countries. This, along with the attractive pricing, puts the company in a solid position to tap into a vast addressable market that consists of a billion underpowered PCs and Chromebooks, an identical number of iOS and Mac devices, and 4 billion Android users.
And finally, Nvidia has partnered with key companies to push its cloud gaming business. Samsung and LG, for instance, are offering GeForce Now on their televisions, while AT&T has also struck a partnership with Nvidia to offer the service to its subscribers.
Such moves could ensure the healthy growth of Nvidia's cloud gaming business in the long run and help the company remain a top video gaming stock for a long time to come.
