Artificial intelligence (AI) has been the biggest catalyst for Nvidia (NVDA -2.69%) in 2023 as the rapid adoption of this technology has led to a sharp spike in the company's revenue and earnings. But the chipmaker is set to receive a nice shot in the arm from another key market as we approach the end of the year.
Nvidia made its name as a manufacturer of graphics processing units (GPUs) for gamers, but its reliance on that market has declined ever since its chips started getting deployed in data centers. Still, gaming accounts for a nice chunk of Nvidia's top line and is its second-largest business. It produced $2.5 billion in revenue in the second quarter of fiscal 2024 (the three months ended July 30), which was almost 19% of the company's total revenue.
The good part is that this business has stepped on the gas lately thanks to improving conditions in the PC market, and it could play an important role in helping Nvidia sustain its solid momentum, both in the short and long run.
Nvidia's gaming business is accelerating once again
The crash in PC sales last year sent Nvidia's gaming revenue down 27% in fiscal 2023 (ended Jan. 2023) to $9.07 billion. PC shipments were down 16% in 2022 to 292 million units, according to market research firm IDC. The drop in PC demand negatively impacted sales of Nvidia's gaming graphics cards, leaving the company with a big chunk of unsold inventory.
The company's margins took a hit, and its overall business remained depressed last year. The trend continued in the fiscal 2024 first quarter as its gaming revenue was down 38% year over year to $2.24 billion. However, a big turnaround arrived the next quarter when gaming revenue jumped 22% year over year.
This sudden spike in Nvidia's gaming segment coincides with signs of stability in the PC market. IDC points out that PC shipments were down 29% year over year in Q1 2023. This was followed by a 13% decline in Q2. With shipments down only 8% in Q3, the PC market appears to be on the road to recovery.
The research firm added that "PC inventory has also become leaner in the past few months and is near healthy levels in most channels." So, it won't be surprising to see further improvements in the PC market in the final quarter of the year, followed by a recovery in 2024 when the market is expected to return to growth. IDC projects shipments will increase about 4%.
This bodes well for Nvidia's gaming business, which has already started picking up. Jon Peddie Research estimates sales of PC gaming hardware could increase 11% in 2024 to $41.4 billion following an identical decline in 2023. Meanwhile, TechNavio forecasts the gaming GPU market alone is expected to clock a compound annual growth rate of 16% between 2022 and 2027, adding over $30 billion in revenue during this period.
Why the gaming business is built for long-term growth
Nvidia is in pole position to corner a big chunk of the incremental growth opportunity in the gaming GPU market as it already controls 80% of this space, according to Jon Peddie Research. More importantly, Nvidia has a huge installed base of gamers who are likely to upgrade to its new range of gaming cards.
In June, the company pointed out that 56% of its installed base was using non-RTX series graphics cards. The first generation of the company's RTX cards was launched five years ago, which means these users are in a prime upgrade window right now. Additionally, Nvidia said its latest generation Ada Lovelace graphics cards command an average selling price (ASP) of more than $699, which is 3 times the ASP of its first-generation RTX series Turing graphics cards.
Meanwhile, Nvidia anticipates further growth in the global installed base of gamers over the next three years. All of this supports the potential for its gaming business to benefit from a combination of higher ASPs and stronger volumes. That would turn the segment into yet another growth driver for Nvidia in the long run, complementing the terrific growth it's witnessing in AI.
Analysts also expect Nvidia's earnings to increase rapidly thanks to its pricing power in AI chips.
Data by YCharts.
A similar scenario in the PC gaming market thanks to the rising ASP of gaming GPUs means Nvidia could deliver even stronger growth. That's why savvy investors looking to buy a growth stock right now should consider accumulating shares of Nvidia and take advantage of the 15% slide in the company's stock price since the beginning of September.
