NVIDIA's high-end GeForce GTX 980 Ti is one of the fastest gaming GPUs that the company sells today. Image source: NVIDIA.
For quite a long time, many in the investment community seemed to lump graphics processor specialist NVIDIA (NVDA 3.81%) along with many other highly PC levered names. It's not hard to see why some investors would do so; after all, NVIDIA's bread-and-butter business involves selling graphics chips that go into -- you guessed it -- personal computers.
However, there is a subtlety that many investors missed for quite a while. Although the general PC market is generally viewed to be in pretty rough shape, it's also known that there are pockets within the PC market that are actually in quite good shape.
One such pocket is the market for gaming PCs and related hardware.
Why are gaming PCs doing so well in a generally bad PC market?
If you think about why the PC market is in poor shape, it really comes down to the fact that it's very hard to convince users to upgrade their old PCs.
Part of this is the fact that many of the tasks that users had previously required PCs for -- checking email, using social media, and even casual gaming -- can now be done quite nicely on portable mobile devices such as smartphones and tablets. It also doesn't help that those same basic tasks will work just fine on older PCs.
The world of PC gaming is much, much different, though. This is a market where the applications that people care about (triple-A games) are continually pushing the envelope in terms of the performance required. Furthermore, with the advent of higher-resolution monitors and monitors with high refresh rates (requiring hardware that can actually render games at correspondingly high frame rates), there seems to be a never-ending need for increased graphics grunt among gamers.
NVIDIA has become the vendor of gaming-oriented graphics chips
NVIDIA's success over the last year has seemingly been as a result of a growing revenue opportunity in stand-alone graphics processors. Note that although the overall market for stand-alone graphics processors is believed to be in decline from a unit perspective for a number of reasons, there appears to be significant growth in the high end of the market for the reasons described above.
NVIDIA has also done a good job of snatching away fairly substantial amounts of market segment share from longtime rival Advanced Micro Devices (AMD 7.31%) thanks to a combination of best-in-class products, smart marketing, and a solid strategy to instill in the minds of buyers that its GeForce GPUs aren't "just" components but instead represent platforms.
All told, NVIDIA reported seeing its gaming GPU revenues grow a whopping 40% year over year in its most recent quarter, which in my book is a truly excellent result.
NVIDIA is essentially all in on trying to build leadership products aimed at PC gamers and I think that this focus will allow it to maintain a product/technology leadership position over Advanced Micro Devices. This should allow the company to maintain the market share position that it has built (it has more than 80% of the market according to Jon Peddie Research) in the market, give or take a few points either way here or there depending on the quarter and product launch timings.
Additionally, I suspect that NVIDIA will work to try to deliver higher tiers of products that allow it to sell a richer mix of products, ultimately helping revenues/average selling prices. Finally, to the extent that the unit total addressable market for gaming PCs/graphics chips grows -- and I think it will grow over time -- NVIDIA should benefit.
