What Could Be The Revenue Impact of Nintendo Switch For Nvidia?

Last month, Nvidia (NASDAQ:NVDA) announced that its Tegra processor will power Nintendo’s upcoming game console, the Switch. Landing this socket is a notable win.  Moveover, taken with the strong momentum of the company’s DRIVE PX 2 platform with autonomous car makers, it demonstrates that Nvidia’s strategy for its Tegra processor business seems to be successfully evolving since the company exited its efforts in the smartphones in 2015. Given that Nvidia had failed to gain a spot for its Tegra processor in any leading gaming console until now, this partnership is quite significant for the company. At present, major gaming console companies such as Microsoft and Sony use AMD’s GPU to power their Xbox One and PlayStation 4 gaming consoles, respectively. Even Nintendo uses an AMD GPU for its current gaming console — the Wii U.

In this analysis, we analyze the possible revenue impact that this deal can have for Nvidia.

Estimating the number of Nintendo Switch units that can be sold: The Nintendo Switch is expected to be launched in March 2017. According to some sources, Nintendo Switch is a brand new concept and not a direct successor of Nintendo’s Wii U or 3DS. In a shareholders report in July 2016, Nintendo’s management stated that they had expected the Wii U to sell 100 million units but they could manage to sell only 13 million units sold worldwide. The management seems to be relying on the success of Switch to make up for lack of expected demand for the Wii U. Certain sources estimate that Nintendo expects to sell approximately 2 million units in the first quarter of 2017 itself. For the purpose of our calculation, let us assume three scenarios related to the number of units that could be sold by Nintendo going forward.

Scenario 1 – Nintendo manages to sell 8 million units (2 million/quarter x 4) each year for the next five years.

Scenario 2 – Nintendo sells 5 million units for the next five years.

Scenario 3 – Nintendo manages to sell only 2 million units each year for the next five years.

Estimating Price of Nvidia’s Tegra Processor For Nintendo Switch:  Some sources compare Nintendo Switch to Microsoft’s Xbox One and Sony’s Playstation 4, because Switch is both a handheld and a hybrid console. For the purpose of our analyses, let us assume that the price of a Nvidia’s GPU in Nintendo Switch is comparable to the price of an AMD GPU in Playstation 4/ Xbox One. According to a blog on IHS Markit, the cost of an AMD processor in Xbox One is around $100. For the purpose of our calculation, let us assume three scenarios related to the price at which Nvidia could supply its Tegra processor to Nintendo.

Scenario 1 – Nvidia sells its Tegra processors at $150, higher than the $100 price at which AMD is supplying its GPU in Microsoft’s Xbox One. This scenario is possible if we consider that Nvidia’s discrete graphics processors for PC gaming are generally priced higher than that of AMD, for a similar performance. Further, Nvidia could be charging a premium, due to the huge success and high performance of its Pascal GPUs.

Scenario 2 – Nvidia sells its GPUs to Nintendo at $100, similar to the price of an AMD GPU in Xbox One, in order to remain competitive in the market.

Scenario 3 – Nvidia sells its GPUs at $80. This could be a probable scenario if we consider the fact that Nvidia had failed to gain a spot for its Tegra processor in any leading gaming console until now. Due to this factor, the company might not be concerned about achieving higher profitability in Nintendo Switch (in the short-term) and might be eyeing the larger goal of gaining more design wins in other gaming consoles going forward.

In the latest earnings call, Nvidia said that Nintendo “tends to stick with an architecture for a very long time”. In the table below, we can see the range of revenue estimates for Nvidia based on this deal over the next 5 years, assuming that Nintendo relies on Nvidia’s Tegra processor at least for the next five years.

Note: Our above estimates are for each year for the next five years. 

From the above table, we can see that the revenue impact for Nvidia from the Nintendo deal can vary from $160 million to $1.2 billion. However, it should be noted that this is just the start for Nvidia in gaming consoles, we could witness more design wins for Nvidia with other gaming console companies going ahead. With respect to Nvidia’s current revenue, the Nintendo Switch is clearly a huge opportunity for the company.