Worldwide PC shipments declined 9.5% annually during the second quarter, according to research firm Gartner, causing chipmakers Intel and AMD to slip after reporting lackluster earnings.
Yet NVIDIA (NVDA +0.00%), which manufactures graphics chips and mobile processors, posted surprisingly solid second quarter results. During the period, NVIDIA revenue rose 5% annually to $1.15 billion, topping estimates by $140 million. GAAP earnings fell 77% to $0.05 per share, missing estimates by five cents, but that was mainly caused by winding down its Icera modem business and a recent recall of Shield devices. On a non-GAAP basis, NVIDIA earnings rose 13% to $0.34 per share.
The NVIDIA high-end GTX 960. Source: NVIDIA
Thanks to those strong numbers, its stock has climbed 18% in August. After that rally, does the stock still have room to run?
NVIDIA's strengths
GPU sales rose 9% annually to $959 million, accounting for 83% of the top line. Much of that growth was attributed to a 51% jump in sales of its GeForce graphics processors for high-end gaming. This steep increase was likely due to the release of more graphically demanding games, which convinced gamers to upgrade their graphics cards.
During the earnings call, CEO Jen-Hsun Huang expressed confidence that triple-A titles in the second half of 2015 -- including new Call of Duty, Star Wars, Assassin's Creed, and Metal Gear Solid titles for the PC -- would fuel robust demand for GeForce graphics processors. At the end of 2014, NVIDIA controlled over three-fourths of the add-in graphics board market, according to research firm JPR, while the remainder was claimed by AMD Radeon cards.
Metal Gear Solid V: The Phantom Pain for PC. Source: Konami
NVIDIA's weaknesses
However, PC OEM GPU sales fell annually last quarter due to weak demand for consumer PCs. Fortunately for the company, growth in its GeForce GPUs offset that decline. Intel remains the market leader in PC OEM GPUs, thanks to the widespread use of its integrated graphics solutions for desktops and laptops.
Tegra mobile processor chip sales also fell 19% annually to $128 million, or 11% of the top line, due to the continued dominance of Qualcomm mobile chips in the smartphone and tablet markets. Increased interest in mobile chips from Intel and Samsung also threaten to marginalize Tegra's market presence.
NVIDIA had been using Shield devices to showcase the graphical horsepower of Tegra processors, but the recent recall -- related to battery fires -- has cast doubts on the future.
NVIDIA's opportunities
Looking ahead, Huang believes that four growing markets could boost NVIDIA sales in the future -- virtual reality, supercomputers, smart cars, and e-sports.
The company is currently developing VR hardware with Valve and the Oculus. The VR market is still a fledgling one, but research firm Digi-Capital estimates that it could be worth $30 billion by 2020. For supercomputers, Huang cited President Obama's recent executive order to build a supercomputer 30 times faster than any other one in existence -- which could mean big future orders of Intel processors and NVIDIA GPUs.
For cars, Huang believes that his chips will benefit from higher demand for infotainment screens and crash-avoidance image sensors for autonomous and semi-autonomous cars. As for e-sports, time spent watching professional gamers has soared from 1.3 billion hours in 2012 to 3.7 billion worldwide in 2014, according to ESPN. The growth of that market could lift sales of high-end NVIDIA graphics cards and serve as a great promotional platform for its products.
The verdict
NVIDIA's numbers appear strong, but it is clear that the company's future relies on a delicate balancing act between rising sales of GeForce cards and declining sales of PC OEM GPUs and Tegra processors. If demand for gaming graphics cards unexpectedly wanes, the top and bottom line growth could stall out or decline.
NVIDIA is not cheap stock, trading at about 25 times earnings and 2.7 times sales, versus an average of 21 times earnings and 0.6 times sales for the specialized semiconductor industry. By comparison, Intel trades at 13 times earnings and 2.5 times sales. Analysts also expect NVIDIA revenue growth to remain flat for this year (fiscal 2016) and for GAAP earnings to decline 27%.
The company's ability to sidestep the slowdown in the PC market with high-end GPU sales is impressive, but its other business units still need to bounce back before its top and bottom line growth can be considered sustainable.
