The PC market appears to be unraveling. IDC reported that PC shipments declined by a staggering 11.8% year-over-year during the second quarter, while Gartner puts the decline at a slightly better 9.5%. What's more, these companies are predicting a decline for the full year of 6.2% and 4.4%, respectively. It seems that Windows 10 won't be the savior of the PC this year.
Many companies exposed to the PC market have had their stocks decline in recent months. But investors shouldn't be eager to sell shares of graphics-chip company NVIDIA (NVDA +0.29%). Despite NVIDIA's dependence on the PC market as a whole, the gaming PC market is faring much better, and NVIDIA can do well even in a difficult PC environment.
PC sales are in a rut
The PC market isn't dying. Some of the decline during the second quarter is undoubtedly due to the imminent release of Windows 10, with consumers and businesses holding off on purchases until after the new operating system is released. However, since Windows 10 will be free for consumers upgrading from Windows 7 and Windows 8, the new OS may not trigger much of a PC refresh cycle this time around.
IDC does expect PC unit shipments to grow at a 0.4% compound annual growth rate through 2019, with a recovery in sales coming in 2016 and beyond. This extremely slow growth, assuming it actually occurs, doesn't bode well for companies with a strong exposure to the broader PC market. Intel expects to report flat revenue this year, with its fast-growing data center business canceling out weakness in its PC business, and AMD is currently a train wreck.
NVIDIA is certainly not immune to the effects of the weak PC market. The company has guided for a year-over-year revenue decline of about 8.5% during the second quarter, reflecting the lull in PC demand leading up to Windows 10. However, PC gaming is going through somewhat of a renaissance, and the growing market can drive NVIDIA's results irrespective of the performance of the PC market as a whole.
The gaming PC market
The PC gaming hardware market brought in $21.6 billion in 2014, twice as much as the gaming console hardware market, and Jon Peddie Research expects the market to grow to $23.1 billion by 2017. NVIDIA focuses heavily on the high end of the GPU (graphics processing unit) market, and for good reason: Jon Peddie Research expects the Enthusiast portion of the market to account for 44% of revenue by 2017. These are customers who routinely buy high-end GPUs, CPUs, and monitors, putting performance and experience above cost.
By 2016, research firm PwC expects sales of PC games to surpass sales of console games, reaching $29 billion globally. The popularity of PC gaming in China, where game consoles were banned until recently, is one of the key driving forces behind this growth.
Another major reason PC gaming is currently surging is digital distribution, particularly Steam. Essentially all PC games are now bought digitally, and Steam has emerged as the dominant digital platform. This has not only reduced the friction involved in buying PC games, but it has also made it far easier for small, independent studios to release PC games. While game consoles are defined by blockbusters such as Call of Duty, the breadth and variety of PC games available on Steam gives PC gaming a major advantage.
Don't sell NVIDIA on PC weakness
NVIDIA's gaming revenue rose by 25% year over year during the first quarter, even as its total revenue grew by just 4%, driven by its latest GPUs. The markets for PC gaming hardware and software are expanding even as the PC market slumps, and NVIDIA should be sheltered from the weak PC market far more than many other PC-centric companies.
Going forward, the increasing affordability of 4K screens and the coming release of virtual reality headsets should further grow demand for high-end GPUs. The Oculus Rift will require a fairly high-end PC, with an NVIDIA GTX 970 or better recommended, and 4K displays have four times the pixels as standard 1080p displays. If the hype surrounding virtual reality turns out to be justified, NVIDIA could see a major boost in demand for its GPUs once VR goes mainstream.
In the short term, PC sales are going to hurt NVIDIA's results in the run-up to Windows 10. But in the long term, demand for NVIDIA's graphics chips seem very likely to rise, regardless of what the PC market does as a whole. While avoiding shares of companies such as Intel or Micron may make sense in light of the weak PC market, NVIDIA shouldn't be lumped together with other PC-centric companies.
