With all that talk going on about the imminent death of the PC, there have been rampant fears that gaming PC chip manufacturer, Nvidia (NVDA), would soon find itself between a rock and a hard place. After all, 2015 has shaped up to be one of the worst years for the PC industry, with double-digit declines in shipments recorded in both quarters.
But Nvidia’s latest results prove that, while the PC is looking like an also-ran, PC gaming is alive and well.
Nvidia’s growth has slowed somewhat, but is nowhere nearly as bad as earlier feared. Nvidia stock posted revenue of $1.15 billion, representing 5% year-over-year growth and topping estimates by $140 million. Meanwhile, GAAP earnings of 5 cents per share of Nvidia stock missed estimates by 5 cents.
However, the company would have posted much better earnings were it not for the massive 19-cent-per-share charge it took after winding up its 4G/LTE baseband operations in May, and a smaller 2-cent charge it took for the recall of 88,000 defective Shield gaming tablets sold between July 2014 and July 2015.
A lot of pessimism surrounded Nvidia stock coming into the earnings season, with shares down 8% in just the past three months. But the healthy report was well received by the investing world, bidding Nvidia stock up 16% since reporting earnings.
Nvidia Stock Benefiting From Robust Gaming Environment
It appears as if Americans have a newfound love for games and entertainment. The U.S. entertainment industry has been doing exceptionally well, with companies such as Disney (DIS) and Universal Pictures hitting record domestic box office revenues. The console gaming sector has not been left far behind either, with both Sony’s (SNE) PS4 and Microsoft’s (MSFT) Xbox consoles flying off the shelves.
But the PC remains the most popular gaming platform, with nearly 40% of the gaming market, according to Gap Intelligence. Nvidia is primarily a gaming chip manufacturer, with roughly a 75% GPU market share and more than 80% of its revenue coming from GPUs. GPU sales for Nvidia were up 9% for the quarter.
Advanced Micro Devices (AMD) is one of Nvidia’s chief competitors, though the company is unlikely to cause it much trouble for NVDA stock any time soon. AMD is mired in deep in a conundrum of ever spiraling costs and widening losses, as its much-hyped microserver chips that were supposed to give the likes of Intel (INTC) and Qualcomm (QCOM) a run for their money look like a no-trick ponies.
Though rumors have been flying that AMD might end up spinning off its server division from its gaming segment, perhaps nothing short of a complete takeover can save the ailing chipmaker. To truly dominate a semiconductor chip manufacturing segment takes a lot of investment in R&D, and AMD’s ailing balance sheet severely limits its ability to do this.
Just look at Nvidia’s decision to exit the 4G/LTE business. Nvidia simply lacked the financial wherewithal to compete in an industry dominated by well-heeled titans such as Qualcomm, MediaTek and Spreadtrum. Nvidia can now invest the cost savings in its Tegra processors, which are powering the next wave of driverless car technology.
Driverless Cars a Looming Reality
Driverless and semi-autonomous cars are all the rage on Wall Street right now, and companies such as Mobileye (MBLY) with heavy exposure to the sector have been receiving a lot of investor love.
Nvidia has emerged as one of the early market leaders in autonomous driving technology, with the company’s Tegra 4 processors being employed by 19 luxury automakers including Porsche, Lamborghini, Bentley, Maserati, BMW and Roll-Royce in their navigation and infotainment systems. The company’s processors have lately been finding their way into mid-and-lower end vehicles as well, as Nvidia pointed out during its latest earnings call that it’s working with 50 automakers in their autonomous driving efforts.
Nvidia’s Tegra sales were down 19% year-over-year, mainly due to the Shield recall and Microsoft’s recent decision to use Intel’s Atom processors in the Surface 3 instead of ARM-based chips. But, Tegra sales are likely to grow from here given Nvidia’s continuing success in driverless car technology.
Driverless and fully autonomous vehicles might not become a reality until seven or so years down the road. But Nvidia stock won’t have to wait that long to benefit.
The National Transport Safety Board has been lobbying safety regulators such as NHTSA to make forward-collision avoidance systems mandatory for all vehicles in the U.S. The organization says that only 4 out of 684 U.S. passenger vehicle models featured a complete forward-collision avoidance system as a standard feature in 2014.
With the U.S. motoring regulatory environment taking more strict safety control measures, there is a good chance that the proposal might soon be enforced by law. Needless to say Nvidia stock would one of the key beneficiaries of such a move.
As of this writing, Brian Wu did not own any of the aforementioned securities.
