For nearly a decade, many investors have been worried about how the decline of the PC and the rise of "good enough" computing would impact graphics specialist NVIDIA (NASDAQ:NVDA).
Originally, the worry was that improvements to the integrated graphics in Intel (NASDAQ:INTC) processors would make NVIDIA's discrete graphics cards unnecessary for most users. Later, an even bigger concern emerged: the potential death of the PC.
However, NVIDIA's latest quarterly results showed that these worries were overblown. It's true that most mainstream computers have moved to integrated Intel graphics cards. And PC sales have fallen considerably in the past five years. But there are still hundreds of millions of PC gamers in the world, and they continue to snap up NVIDIA graphics cards at a fast pace.
NVIDIA diversifies away from the PC
Looking back at NVIDIA's strategic initiatives over the past decade or so, it's clear that the company has been positioning itself to survive the decline of the PC. It exited its PC chipset business beginning around 2009, due in part to legal wrangling with Intel over patent cross-licensing agreements.
Around the same time, NVIDIA began investing heavily in new areas. Most notably, it bet big on a new line of mobile processors called Tegra. During 2011 and 2012, Tegra racked up design wins for numerous smartphones and tablets. Less publicly, NVIDIA poured a lot of effort into designing chips for high-performance computing applications.
These efforts have had mixed success. NVIDIA has become a dominant force in high-performance computing, but Tegra chip sales fell well short of expectations in the mobile market. On the plus side, NVIDIA has had some success repositioning Tegra as a chip for the automotive industry and mobile gaming devices.
PC graphics chips are still big sellers
The remarkable thing is just how well NVIDIA has done in the "traditional" PC segment. In its recently ended third quarter, gaming GPU revenue skyrocketed more than 40% year over year. At $761 million, this segment represented more than 58% of NVIDIA's Q3 revenue.
By contrast, NVIDIA saw year-over-year revenue declines across the rest of its business, including Quadro professional graphics cards, Tesla and GRID datacenter chips, and Tegra mobile chips.
It is therefore fair to say that the strong growth of its PC gaming business singlehandedly drove NVIDIA's huge earnings beat last quarter. Revenue came in a little more than 10% above the midpoint of the guidance provided in August, while gross margin remained strong as customers have been willing to pay up for top-of-the-line graphics cards.
The result was GAAP earnings per share of $0.44, up 42% year over year and far ahead of the average analyst estimate of $0.25.
This market isn't going anywhere
NVIDIA's efforts to diversify its business should be applauded. Even if PC gamers continue to drive sales growth for NVIDIA's GPUs, the company's other business lines already provide a significant contribution to its revenue and earnings and should drive plentiful future growth.
Fortunately, the PC market should also continue contributing meaningful growth for NVIDIA for the foreseeable future. What the skeptics have overlooked is that while integrated graphics cards have improved dramatically in performance, PC games have become more and more demanding.
Indeed, game developers (and consumers) have shown in recent years that they will use all of the graphics performance improvements that can be achieved. This means that not only is an Intel integrated graphics chip a poor substitute for an NVIDIA discrete graphics card -- even an NVIDIA GPU from a few years ago can't keep up very well with the latest games.
That means hardcore gamers need to upgrade to the latest GPUs on a fairly frequent basis. This trend shows no signs of slowing, and should drive solid sales for NVIDIA for the foreseeable future.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Intel and Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.