Chip maker NVIDIA (NVDA) relies heavily on its gaming business for more than half of its revenue. However, lately, its Gaming segment has been underperforming. It’s seen revenue declines for the past three straight quarters. In the second quarter, the segment’s revenue fell 27% YoY (year-over-year). It fell 39% YoY and 45.2% YoY, respectively, in the first quarter of fiscal 2020 and the fourth quarter of fiscal 2019.
NVIDIA’s falling gaming revenue
NVIDIA’s Gaming segment took a hit when cryptocurrency demand vanished in the fourth quarter of fiscal 2019. The loss of crypto demand led to excess channel inventory, which weighed on the company amid deteriorating end-market conditions. In the fourth quarter, NVIDIA also launched the expensive GeForce RTX 2060 graphics card for PC gaming. The slowdown in China also disrupted the sales of high-priced gaming graphics cards.
In the first half of fiscal 2020, NVIDIA saw a slow uptake for its next-generation Turing-based GeForce GPUs. Gaming revenue took a hit because few games supported ray tracing technology. In the second quarter, fewer shipments of graphics cards for desktop PCs and system-on-chip components for gaming systems pulled down NVIDIA’s revenue.
NVIDIA to boost gaming with ray tracing adoption
NVIDIA’s ray tracing technology offers users a unique and more realistic gaming experience. It boasts improved lighting effects, shadows, and colors. NVIDIA introduced its RTX tech at the Game Developers Conference in March 2018. Since then, it’s already launched various versions of its RTX GPUs (graphics processing unit) to boost the technology. The company’s launch of its GeForce RTX Super graphics cards is also expected to improve the gaming experience.
NVIDIA also inked an agreement with software maker Microsoft (MSFT) at Gamescon in Germany on August 19. Through the deal, NVIDIA will offer its RTX ray tracing technology to Microsoft’s video games. The technology will initially be available in the PC version of Microsoft’s Minecraft. Minecraft is the world’s top video game and has sold over 176 million copies worldwide. Therefore, the Minecraft partnership will let NVIDIA expose its ray tracing technology to mainstream gamers worldwide.
NVIDIA is also expanding cloud games to Android
NVIDIA is also expanding its cloud gaming service, GeForce NOW, to Android users across PC, Mac, and SHIELD TV. The company will later offer Geforce NOW access to mobile users. NVIDIA has also partnered with Softbank and LG U+ to expand its cloud gaming service to Japan and Korea. GeForce NOW is currently adopted by LG’s and Samsung’s (SSNLF) flagship devices. Samsung smartphones also deploy rival Advanced Micro Devices’ (AMD) gaming GPUs.
NVIDIA, a leader in the discrete GPU market, faces stiff competition from AMD in the space. In July, AMD launched its 7 nm (nanometer) Navi GPU to give competition to NVIDIA’s RTX 2070 GPU in the gaming sector. NVIDIA then released a refreshed version under the Super GPU line-up to compete with AMD’s new GPU line-up. AMD also has plans to take over NVIDIA with its latest PC GPUs next year.
NVIDIA stock is gaining momentum
NVIDIA stock has been on a growth trajectory since June despite global uncertainties and the crypto bubble burst. The stock has gained 26.02% YTD (year-to-date) as of August 20. Investors are optimistic that the graphics chip giant will recover in the near term, as it’s gaining chip demand.
Institutional investors are also boosting their stakes in NVIDIA, as the company is trying to expand in gaming as well as other growth areas. Gaming revenue is likely to grow owing to strong demand for laptop GPUs and game console processors. NVIDIA is focusing on high-growth markets such as automotive, AI, data center, and professional visualization.
Autonomous vehicle development agreements have also boosted NVIDIA’s reach in the automotive space. NVIDIA will also supply chips to the automotive sector due to the high demand for GPUs in the data center and automotive spaces. The company’s acquisition of Mellanox is expected to help it expand its reach in the data center market.
Easing trade war pressure
NVIDIA is also likely to gain from the recent delay in US tariffs on Chinese goods until December 15. Washington has also granted a 90-day reprieve to trade with Huawei on August 19. The reprieve came as a big relief to semiconductor stocks, including Qualcomm, Intel, and Micron. Chip makers make significant revenue by selling chips and other components to Huawei.