3 Things NVIDIA Corp. Wants You to Know About Its Gaming Business

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On March 27, graphics giant NVIDIA (NASDAQ: NVDA) hosted its annual financial analyst day. During this event, the company went over its overall strategy as well as key information about each of its individual business segments.

NVIDIA's largest business segment in terms of both revenue as well as overall gross profit contribution is its gaming business.

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Most of NVIDIA's gaming revenue comes from the sale of graphics processing units, or GPUs, which accelerate the rendering of realistic 3D games on personal computers. The company recently re-entered the game console chip market as a processor supplier into the Nintendo Switch handheld console, however.

Here are three important things about NVIDIA's gaming business that the company highlighted during its analyst day presentation.

1. Growing units and average selling prices

NVIDIA's gaming business enjoyed significant growth during its most recently ended fiscal year (2018), with revenue surging 36% year over year.

That growth, NVIDIA says, has been driven by both increases in unit shipments and average selling prices in its GPUs, which are sold under the brand GeForce. Over the last five years, NVIDIA's gaming business has seen its revenue enjoy a compound annual growth rate (CAGR) of 29%.

NVIDIA went into some additional detail, saying that graphics processor average selling prices enjoyed an 11% CAGR (due to gaming customers buying increasingly high-end graphics processors) and graphics processor unit shipments saw a healthy 15% CAGR over that same five-year period.

2. Installed base still has room to upgrade

NVIDIA also provided some information about the current GeForce graphics processor installed base. Per the company, just 30% of gamers are using GeForce graphics processors based on its latest graphics architecture, known as Pascal. Seventy percent of them are using older-generation GeForce processors.

For reference, NVIDIA's Pascal-based graphics processors first hit the market nearly two years ago.

NVIDIA's purpose in showing that installed base information is likely to illustrate that the company has significant opportunity left to get current GeForce users to upgrade to Pascal-based products in the quarters ahead.

Recently, it has been difficult for gamers to get their hands on Pascal-based graphics cards at affordable prices due to the explosion in demand for graphics cards for use in cryptocurrency mining.

Demand for graphics cards for use in cryptocurrency mining appears to be waning as the prices of cryptocurrencies like Ethereum decline, so it may soon be easier for gamers to buy Pascal-based graphics cards at standard prices, ultimately increasing the penetration of Pascal within the GeForce gamer installed base.

3. Gaming is becoming more demanding

NVIDIA says that during fiscal year 2018, the average selling price of GeForce-based graphics cards was $200 -- up from $160 in fiscal year 2015. That average selling price increase is undoubtedly due to the continued increases in the performance demands of the latest 3D video games.

NVIDIA, of course, benefits from games becoming more demanding, and even cited technologies like 4K displays, virtual reality, and the real-time ray-tracing technology that it aims to have game developers adopt.

The more realistic and demanding that games get, the more likely it is that gamers will want to buy higher-end graphics cards from NVIDIA to ensure that they can run games smoothly at higher-quality settings.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.