1 Massive Green Flag for Nvidias Future
The graphics specialists biggest business is built for terrific growth.
The video gaming business has been the cornerstone of Nvidia's (NVDA -0.74%) rapid growth over the years, and there is solid evidence that it will continue to act as a catalyst for the company for a long time to come.
The graphics specialist recently revealed that it is sitting on a $100 billion addressable revenue opportunity in the gaming segment. That points toward a tremendous growth opportunity -- gaming produced $12.5 billion in revenue for Nvidia in fiscal 2022 (which ended on Jan. 30), recording 61% growth over the prior year.
Let's look at the reasons why Nvidia is in a terrific position to capitalize on the massive end-market opportunity in the gaming business.
Image source: Getty Images.
A graphics card upgrade cycle is underway
Nvidia points out that only 29% of its installed base currently uses the RTX series graphics cards, with the rest on the much older GTX series cards. It is worth noting that the last generation of GTX series cards was based on the Pascal architecture, and they were released nearly six years ago. The older cards do not support features such as ray tracing and resolution upscaling that provide a more immersive gaming experience.
As a result, more gamers can be expected to upgrade to Nvidia's latest graphics cards. What's more, customers buying Nvidia's latest cards based on the Ampere architecture are spending $300 more on each unit compared to older-generation cards. So Nvidia is enjoying a healthy mix of higher volumes and stronger average selling prices (ASPs).
More specifically, Nvidia's graphics card ASP has increased at a compound annual rate of 13% over the past five years, while unit sales have increased at an annual rate of 11%. Given that the Ampere-based gaming graphics cards were released less than two years ago, Nvidia should continue enjoying a bump in both volumes and ASP as the upgrade cycle continues.
On the other hand, the use of discrete graphics cards in laptops is also on the rise. Nvidia points out that its revenue from gaming laptops has clocked a compound annual growth rate (CAGR) of 34% over the past five years. This growth has been driven by a 13% annual increase in ASP and a 19% annual increase in units over the five-year period.
Gaming laptops accounted for just over 10% of the overall laptop market in 2017. That proportion has increased to nearly 25% by 2021, indicating that there is further room for growth in this space. According to a third-party estimate, sales of gaming laptops could hit nearly $18 billion in 2026, compared to $11 billion in 2020.
Throw in the fact that Nvidia is the leading seller of discrete graphics cards that are used for gaming, and it becomes easy to see why the company's video gaming business could keep growing at a solid pace. Jon Peddie Research estimates that Nvidia dominated the discrete graphics card market at the end of 2021 with a share of 81%, which puts the company in a great position to benefit from an increase in sales of gaming and desktop GPUs (graphics processing units).
Nvidia is dominating this nascent gaming niche
Nvidia has become a dominant player in the cloud gaming market, which is currently in its early phases of growth. The company's GeForce Now gaming service has racked up 15 million users. Video gaming industry analytics provider Newzoo estimates that the cloud gaming market had 23.7 million paying users last year, which means that Nvidia has already cornered a nice chunk of this market, which is set to grow rapidly in the long run.
According to Newzoo, the cloud gaming market reportedly generated $1.6 billion in revenue last year. Nvidia, meanwhile, generated $11.4 billion in revenue from sales of physical gaming graphics cards in fiscal 2022. So it can be assumed that the remainder of its video gaming segment revenue -- just over $1 billion -- came from GeForce Now.
Hence, Nvidia has cornered nearly 63% of this nascent market in terms of revenue. The global cloud gaming market is expected to generate nearly $14 billion in revenue by 2027. If Nvidia manages to control even half of this market in five years, its cloud gaming revenue could increase substantially compared to last fiscal year's levels.
In all, Nvidia's video gaming strength is here to stay for the long run. That's good news for investors, as the gaming segment produced 46% of Nvidia's total revenue of $26.9 billion last fiscal year. With the multiple tailwinds discussed above, this business should continue to move the needle in a big way for Nvidia going forward and help it maintain its status as a top growth stock.