Factors That Led To The Surge In Nvidia’s Gaming Revenues In Q3

Recently, Nvidia (NASDAQ:NVDA) reported its Q3’17 earnings.  The company built on its growth momentum by posting revenues of $2 billion, translating to a 53% increase on a year-over-year basis. It was above the guidance and consensus as well. Nvidia’s stock price has soared by more than 20% since then. One primary reason for the company’s strong overall revenue growth can be attributed to its extraordinary growth in gaming revenues. At $1.24 billion, Nvidia’s gaming revenues increased 63% year over year. It should also be noted that the company’s revenues from gaming constitute more than 50% of its overall revenues. In this analysis, we investigate the factors that have contributed to the strong growth in Nvidia’s gaming revenues. We will also discuss if the company’s revenue from this segment can follow the same trajectory in future.

Expansion In Gaming: The gaming ecosystem and the gaming industry is approximately $100 billion large. Growth in gaming is being fueled by the anticipation of new blockbuster games, the rise of eSports, the emergence of new technologies such as virtual reality (VR) and the expansion in developing countries. The company claims that it is seeing demand for its higher-end GPUs as gamers continue to upgrade to enjoy highly anticipated games such as Battlefield 1, Gears of War 3, Call of Duty: Infinite Warfare. Nvidia’s gaming platform has been growing at a >25% rate for the last two years. Since Nvidia has not fully penetrated the market, we believe that there is ample scope for further growth for the company in the segment.

PC Gaming Still A Major Chunk: Despite the fact that global PC sales have been declining, Nvidia has seen a surge in its gaming revenues. This comes from the fact that PCs still constitute the biggest chunk of the overall gaming industry. Furthermore, during the quarter, Nvidia confirmed that the new Nintendo NX Switch will be powered by its Tegra platform. This is a significant win for the company because until now it had failed to gain a spot for its Tegra processor in any leading gaming consoles. Going forward, we can expect more design wins for Nvidia in gaming consoles.

Pascal GPU launch: Towards the end of Q2 2017, Nvidia launched four major products.  These include the GeForce GTX 1080, 1070 and 1060 for the enthusiast market, as well as the TITAN X, the world’s fastest consumer GPU for deep learning development, digital content creation and extreme gaming. The launch of Nvidia’s Mid-range GPUs such as the GTX 1070 and 1060 have likely helped the company effectively compete with AMD on price points. We believe the company’s expanding Pascal portfolio has helped it retain its growth momentum in the current quarter and should likely help it beyond.

We are in the process of updating our valuation for Nvidia.

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