Nvidia (NVDA +0.10%) has extreme pricing power in its data center GPU business. The company's ultra-powerful data center GPUs have become the standard way to train advanced artificial intelligence (AI) models, and demand has exploded amid the AI boom.
A very different story is playing out in the gaming GPU market. During the pandemic, a combination of strong demand, supply chain issues, and a cryptocurrency bubble pushed graphics card prices into the stratosphere. This favorable environment for Nvidia has since disappeared.
Demand tumbled as the PC market went through a major correction, supply chain issues were largely resolved, and cryptocurrency fell out of favor. Global shipments of graphics cards tumbled 38% year over year in the first quarter, according to Jon Peddie Research.
Nvidia is trying to maintain premium pricing in this new environment but is starting to run up against a harsh reality.
NASDAQ: NVDA
Key Data Points
A quick price cut
Nvidia and rival AMD are now largely finished filling out their latest graphics card lineups. While some new models may be slotted in down the road, what's on the market now is what gamers will have to choose from for the foreseeable future.
Nvidia rolled out its RTX 4060 and two variants of its RTX 4060 Ti over the past few months. With prices ranging from $299 to $499, these new cards brought Nvidia's RTX 40 series to the mainstream portion of the market.
Meanwhile, AMD launched its budget-focused $269 RX 7600 in May. AMD's $449 RX 7700 XT and the $499 RX 7800 XT, which compete with the pricier RTX 4060 Ti, as well as Nvidia's higher-end RTX 4070, launched on Sept. 6.
While AMD's pricing is probably higher than it should be, given the expected performance gains, the company is being aggressive enough to force Nvidia's hand. Nvidia has cut the price of the 16GB variant of the RTX 4060 Ti by $50 to $449 in the wake of AMD's most recent product launch. This version of the 4060 Ti was poorly reviewed, mostly due to the extra memory having little to no effect on performance in most cases.
This price cut comes less than two months after the 16GB version of the 4060 Ti was officially launched. Demand for Nvidia's gaming graphics cards is still far below peak levels. While gaming sales were up sequentially and year over year in Nvidia's latest quarter, they remained down more than 30% from peak levels.
Demand for AMD's graphics cards may be even worse. The company reportedly slashed the price of the RX 7600 at the last minute from $299 to $269, and even at that price, it's a tough sell. AMD's graphics card unit market share was just 12% in the first quarter, according to Jon Peddie Research, down from 24% in the prior-year period.
Pricing pressure could persist
While new families of graphics cards from Nvidia and AMD probably won't be arriving for a while -- perhaps in late 2024 or even 2025 -- Intel is set to launch the second generation of its Arc graphics card line sometime next year. While Intel has faced challenges with its software drivers, the company's first-gen graphics cards offer solid performance per dollar.
More competition should lead to a more favorable pricing environment for consumers. For much of the pandemic, prices were inflated, and Nvidia was selling every graphics card that could be made. That's not the case anymore.
In the near term, the gaming market barely matters to Nvidia because the company's data center segment is booming, thanks to AI-related demand. In Nvidia's most recent quarter, data center revenue was more than 4x gaming revenue. But in the long run, as the AI market matures and competition comes to the AI accelerator market, any erosion of Nvidia's pricing power in the gaming graphics card business could pose a serious problem.
