Graphics chip company NVIDIA (NVDA 3.96%) has so far avoided being negatively affected by a slumping PC market. It posted solid results throughout 2015, growing revenue and profits thanks to market share gained at the expense of rival Advanced Micro Devices (AMD 7.48%). The company's fourth-quarter results are due on Wednesday, and with NVIDIA's guidance calling for year-over-year revenue growth despite weak PC sales, an uncertain macroeconomic environment, and a general downturn in the semiconductor industry, all eyes will be on how NVIDIA's business is holding up against these headwinds.
Image source: NVIDIA.
What analysts expect
NVIDIA's guidance calls for fourth-quarter revenue of $1.3 billion, plus or minus 2%. On average, analysts expect revenue of $1.31 billion, up 4.7% year over year. NVIDIA claimed an 81.1% share of the discrete graphics card market during the third quarter of 2015, up from 76% during the fourth quarter of 2014, so if its share remained roughly flat during the fourth quarter of 2015, revenue should get a bit of a boost year over year.
Turning to earnings, analysts forecast that NVIDIA will report non-GAAP earnings of $0.32 per share, down from $0.35 per share during the prior-year period. It should be noted that NVIDIA blew past analyst estimates for earnings during the third quarter, posting non-GAAP EPS of $0.46, compared to an average estimate of just $0.25. Whether NVIDIA can beat analyst estimates for earnings depends on how well its revenue holds up during the fourth quarter.
The good news
NVIDIA's core business of designing GPUs aimed at PC gaming has so far behaved completely independently from the PC market as a whole, and there's not really a reason to expect that relationship to change. Increasingly, NVIDIA has been shifting away from sales to OEMs, focusing more on sales of high-end graphics cards to PC gamers. NVIDIA's GTX 970, a $300-$350 graphics card launched toward the end of 2014, has become the most popular choice on Steam, beating even Intel's (INTC 6.44%) HD 4000 integrated graphics, according to Steam's hardware and software survey.
It seems that the PC gaming market is splitting into a high-end market, where gamers are willing to pay hundreds of dollars for graphics cards in order to play new games at high settings, and a low-end market, where integrated graphics are sufficient. Intel's integrated graphics have improved dramatically over the past few years, which has no doubt put pressure on sales of low-end graphics cards from both NVIDIA and AMD. But in the high end, NVIDIA has emerged as the dominant player.
With fears of a recession and general economic uncertainty the theme of 2016 so far, it's difficult to say how NVIDIA's gaming GPU business will be affected. Semiconductor companies in general have been feeling the pain, particularly those tied to the PC. AMD reported a 22.7% year-over-year decline in revenue during the fourth quarter, and even Intel is struggling to grow, with PC unit volumes plunging in 2015.
The good news for NVIDIA is that sales of high-end graphics cards don't seem to be affected by PC sales, and that puts the company in a good position to weather a downturn in the industry.
The bad news
Unfortunately, NVIDIA's smaller growth businesses may be severely affected by economic uncertainty. NVIDIA has become a leader in the high-performance computing accelerator market, with its Tesla GPUs increasingly finding their way into the data center, but enterprise deals can get delayed when the economic outlook is uncertain. During NVIDIA's third-quarter conference call, it pointed to lumpiness from large deep learning project as the driver behind an 8% year-over-year decline in data center revenue. I wouldn't be surprised to see NVIDIA report weak enterprise sales again for the fourth quarter, driven by delays.
Shares of NVIDIA have tumbled more than 20% in 2016, which seems like an overreaction to me. Its core gaming GPU business is still by far the most important part of its business, and while enterprise sales have been growing fast, any weakness there won't have a huge effect on the company's results. During the third quarter, data center sales accounted for just 6.3% of revenue, while gaming, OEM, and IP revenue accounted for 73%.
We'll know a lot more about how well sales of high-end graphics cards are holding up when NVIDIA reports its results, and the company's guidance will be extremely important. If NVIDIA manages to guide for revenue growth going forward, that would be a good indication that its core business is mostly immune from the headwinds facing other semiconductor companies.
