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1 Massive Reason Nvidias Tearing Growth Will Continue

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The graphics card specialist continues to dominate this lucrative market.

The lucrative market for discrete graphics cards, used by video gamers in personal computers (PCs) and laptops, has played a crucial role in the terrific growth of Nvidia (NVDA -0.74%) over the years.

Nvidia's graphics cards have become synonymous with PC gaming, and the company's technological advancements in discrete GPUs (graphics processing units) have helped it maintain an upper hand over rivals such as Advanced Micro Devices (AMD -0.39%). This has led to impressive growth in Nvidia's video gaming revenue quarter after quarter.

Data source: Nvidia quarterly report.

The good part is that Nvidia's video gaming revenue is set to head higher in 2022 and beyond as the tech giant isn't going to loosen its grip on this market. This is evident from the latest market share numbers from Jon Peddie Research.

Nvidia's GPU domination is here to stay

Peddie Research estimates that Nvidia finished 2021 with 81% of the discrete GPU market under its control. Rival AMD controlled the rest. It is worth noting that Nvidia maintained its tight grip over the discrete graphics card market throughout 2021 and didn't give AMD much room for growth.

Nvidia was sitting on an 82% share of the market at the end of the fourth quarter of 2020. Its efforts to secure enough components in advance to meet the booming demand for graphics cards last year helped it maintain its impressive control. The status quo is unlikely to change in 2022 as the company is all set to raise its GPU game with the introduction of new cards.

Image source: Getty Images.

Supply chain gossip indicates that Nvidia could launch its RTX 40 series cards in September of this year. The company has reportedly been paying large sums to foundry giant Taiwan Semiconductor Manufacturing, popularly known as TSMC, to ensure that it has enough 5-nanometer wafers to make its upcoming cards. According to third-party estimates, Nvidia reportedly paid $1.6 billion to TSMC in the third quarter of 2021 to secure wafer supply, a figure that could increase to $1.8 billion in the current quarter.

In all, it is expected to pay nearly $7 billion to TSMC to secure wafers for the RTX 40 series cards. This explains why Nvidia chief financial officer Colette Kress said on the company's February earnings conference call that supply is expected to improve each quarter in fiscal 2023.

Nvidia's strategy of loading up on wafer supply before the launch of a new GPU lineup is the right thing to do in order for the company to have enough cards at its disposal to meet the demand from customers and capitalize on the hype around its upcoming cards. The RTX 40 series cards are rumored to be twice as fast as the current generation of Ampere cards, which would make them an ideal bet for a large portion of Nvidia's user base using older cards.

Financial services firm Needham had estimated in February 2021 that only 15% of Nvidia's installed base of 250 million graphics cards users were using the company's latest Ampere chips. This means that there is still a huge chunk of Nvidia's installed base currently running graphics cards that could be at least four years old, as the company had released its Turing cards (Ampere's predecessor) back in 2018.

Given that Nvidia's next-generation cards will be based on a 5nm manufacturing process as compared to Turing's 12nm process, they are likely to pack a serious upgrade in performance over older cards. All of this indicates that Nvidia's upcoming GPUs could fly off the shelves once again, and the company's efforts to shore up supply will help it meet the end-market demand.

AMD, on the other hand, is also expected to use TSMC's 5nm manufacturing process for its upcoming RDNA 3 graphics cards, which is why it is important for Nvidia to flex its financial muscle and secure more supply. It was sitting on a cash pile of more than $21 billion at the end of last quarter, which was way higher than AMD's cash position of $3.6 billion.

The gaming business will continue to be a key pillar of Nvidia's growth

Jon Peddie Research estimates that the discrete GPU market could generate $54 billion in revenue by 2025 as compared to $23 billion in 2020. Nvidia's share of this market means that its gaming business is set to enjoy solid incremental growth in the coming years. The good part is that its unwavering dominance of this segment looks all set to continue because of its solid financial position and upcoming products.

Nvidia generated $12.4 billion in revenue from the gaming segment last fiscal year, accounting for 46% of the top line. The estimated size of the discrete GPU market a few years down the line and Nvidia's control over this space could substantially boost the company's revenue in the coming years, making it an ideal bet on the booming video game industry.

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