According to a fresh report from DigiTimes, some of graphics specialist NVIDIA's (NASDAQ:NVDA) high-end graphics cards are in short supply due to "strong demand," notably in China. This supply/demand imbalance has apparently led to a 15% increase in average selling prices for those chips.
This increase, the article claims, benefits NVIDIA (which supplies the graphics processors) as well as vendors of cards implementing those processors such as Colorful, Galaxy, and ASUSTek. Indeed, the article states that although "most graphics card players" have failed to register unit growth in 2015, their revenues are expected to surge "at least 20%" thanks to price hikes.
Let's take a closer look to see if this report makes sense and, if so, what it may mean for NVIDIA.
It is almost certainly a case of "high demand" rather than "low supply"
NVIDIA's current high end graphics processors (I assume in this case "high-end" means GTX 970 and up) are based on the company's GM204 chip (launched more than a year ago) as well as its GM200 chip (which first debuted in March with a cut-down variant appearing in June).
I suspect that NVIDIA's manufacturing yields on the GM204 chip -- a 5.2 billion transistor, 398 square millimeter chip built in TSMC's (NYSE:TSM) 28-nanometer process -- are probably fairly good at this point given that this process has been in production for about four years, even though the chip is quite large.
The GM200, which packs in around 8 billion transistors and measures in at around 601 square millimeters, is certainly more difficult to manufacture than the GM204 due to its gargantuan size. That said, NVIDIA has been building chips nearly as large on this mature 28-nanometer process for quite some time, so it's unlikely that manufacturing yields for these chips would be surprisingly low so as to drive a supply related shortage.
Also note that the majority of the GM200-based cards that get sold into the consumer market are partially disabled chips, which means that effective yields for those chips should be higher than if NVIDIA were trying to service that market with mostly full-fat GM200 chips.
If true, this should bode well for the company's near-term financial results
NVIDIA, like most companies, offers its financial guidance for the current quarter in ranges. So, for example, NVIDIA's current guidance is for revenue of $1.3 billion give-or-take two percent and gross profit margins (on a generally accepted accounting principles basis) of 56.7 percent give or take 50 basis points.
If what DigiTimes says is true, then I would expect NVIDIA to report financial results at the high end of both of these ranges, particularly given how big a portion the gaming graphics chip market is of the company's total revenue. I'd expect similar on the gross profit margin side as the reported price hikes on the high end graphics chips should help boost margins.
A longer-term observation
What I find interesting is that DigiTimes says that this shortage has led to a rather large boost in graphics card average selling prices. It's important to note that graphics card average selling prices have been on the upswing for quite some time as the low-end of the market has largely been cannibalized by integrated graphics while the ever-increasing demand for graphical horsepower has led to continued growth in higher end, gaming-oriented graphics cards.
I strongly suspect that there is room for additional average selling price growth in the high-end graphics card market. Today, the most expensive single-GPU consumer graphics card that one can buy sells for $999 (the NVIDIA Titan X), with the NVIDIA GeForce GTX 980 Ti and Advanced Micro Devices (NASDAQ:AMD) Radeon R9 Fury X occupying the ~$650 price point.
To improve average selling prices, I believe that there is room for NVIDIA (as well as AMD assuming it has a suitable product) to introduce a card at the ~$799 price point when it rolls out its next generation GPU architecture known as Pascal.
Assuming such a card were to offer a tangible improvement in features/performance over the $650 part, I could see a good chunk of the gamers who bought the $650 GeForce GTX 980 Ti this round going for the $799 card next time around.