Nvidia Corporation (NASDAQ:NVDA) launched its GTX 1080 Ti graphics card at the start of March. Coming off a year that ended with a surge in sales for NVDA’s high end graphics cards, the company had hopes that 2017 would continue that trend.
A new report says video card demand has weakened, however, forcing Nvidia and rival Advanced Micro Devices, Inc. (NASDAQ:AMD) to start cutting prices in response.
Worse, AMD’s response to the GTX 1080 Ti will be coming soon, and it’s being billed as a powerful alternative. Instead of a continuation of the second half surge in 2016, Nvidia could be facing a price war in 2017.
Demand for Nvidia Cards Surge in 2016
2016 was the year that virtual reality began to creep into the mainstream. Facebook Inc’s (NASDAQ:FB) Oculus Rift VR headset was finally available to the public, along with HTC’s Vive. The downside for consumers — besides the high cost of the VR headsets themselves — was the PC hardware needed to power the experience. The good news for Nvidia was that this meant a lot of people upgrading their graphics cards.
4K video gaming also grew in popularity as gamers demanded an ever more immersive experience. Moving all those pixels around while maintaining effects and keeping frame rates solid requires a powerful video card and once again, Nvidia benefited from an upgrade cycle. With AMD struggling in its high-end graphics cards solutions, Nvidia’s GTX 1080 was the card of choice for many and NVDA grew its market share further over AMD.
All of these upgrades culminated with a monster Q3 for NVDA. When it posted the numbers at the start of November, it reported its first ever $2 billion quarter, with revenue up 54% year-over-year. Gaming revenue — primarily graphics cards — was up 63% and accounted for $1.24 billion of that $2 billion.
That trend continued in Q4 (which ended on Jan. 29), but since then, the demand for video cards appears to have fallen off.
Graphics Card Demand Weakens
DigiTimes reports that demand for graphics cards has softened significantly in 2017, despite the launch of Nvidia’s new GTX 1080 Ti. It reports that two of the biggest vendors of PC motherboards recorded their lowest shipments in several years in Q1 2017 (which means fewer graphics cards supplied to install on them), while demand for video cards is weakening, especially in China.
As a result, DigiTimes says, graphic cards manufacturers and retailers have slashed prices. Nvidia GTX 1080 price cuts have seen the sticker drop from $699 to $499 already in 2017, and other cards are being discounted in an effort to goose sales.
This has the potential to turn into a price war.
AMD: New Graphics Cards in the Pipeline
One of the reasons NVDA has dominated AMD in the graphics card space is that AMD simply hasn’t been able to keep up with with capabilities of Nvidia’s offerings.
However, AMD is looking to 2017 to be a resurgence year. It’s launching a line of new Ryzen CPUs that are more powerful and designed to take on the demands of virtual reality. The company is also launching a new Vega GPU architecture in 2017, amid similar claims of greatly increased performance. The company will be releasing those new Vega-based graphics cards in May and that launch will put additional pressure on Nvidia, especially if AMD’s new cards live up to the hype.
According to DigiTimes sources, demand for computer motherboards is expected to pick up in the second half of 2017. With that will come a corresponding boost in demand for graphics cards, but then there is the question of whether AMD is able to field a more competitive card to claw back some market share.
The other issue that could affect Nvidia is whether last year’s boost from VR and 4K gaming adoption will continue, or if most of the players who needed to upgrade have now done so.
The answers to these two questions — AMD’s ability to field a competitive graphic card and the state of 4K and VR PC gaming — will have a lot to do with whether the second half of 2017 is repeat of 2016 for Nvidia, or a more modest period with a costly price war hitting its margins.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
