The 2 Big Drivers of NVIDIA Corporation's Gaming Success

During NVIDIA's (NASDAQ: NVDA) recent financial analyst day, the company offered detailed breakdowns of its various business segments. It offered a wealth of information per segment, and in the coming days, I plan to take a closer look at them in my columns.

The focus of today's article will be on some interesting data points around both unit and average selling price growth within the company's gaming business.

Image source: NVIDIA.

NVIDIA's gaming business primarily consists of sales of graphics processors for both gaming desktop and notebook personal computers. This segment also includes revenue from the sale of the Tegra system-on-a-chip products into the Nintendo (NASDAQOTH: NTDOY) Switch console.

It's well-known that NVIDIA's gaming graphics processor business has been driven by both growth in unit shipments as well as by growth in the average selling prices of the gaming graphics processors that get sold.

At its financial analyst day, NVIDIA offered specifics around the relative contributions of average selling price and unit shipment growth to the overall growth of its gaming graphics chip business. Let's take a closer look at the data.

The five-year trend

NVIDIA says that over the last five years, revenue from its GeForce gaming processors grew at a 25% compounded annual growth rate. Average selling prices, NVIDIA says, rose at a 12% compounded annual growth rate during that time, while unit shipments of its GeForce gaming products increased at an 11% compounded annual growth rate in that time.

What investors can take away from this data is that this isn't just an average selling price story or a unit growth story -- it's a mix of both.

That it's an even mix of both is probably a good thing; if it were all about significant unit growth or all about significant average selling price growth, then the overall trend might be less sustainable than if it is a reasonable contribution from both adding up to substantial total growth.

What's driving these trends?

In its presentation, NVIDIA highlighted the rise of e-sports as a factor driving the growth of the gaming installed base. The basic idea, which NVIDIA management has talked about on numerous occasions goes something like this: as the audience of individuals that watches people play games (particularly competitive multiplayer games, or e-sports) grows, so too will the number of individuals who want to play the games that they watch for themselves.

This dynamic seems to (partially) explain the unit growth trend, but since many (though not all) e-sports games tend not to be all that taxing on graphics processors, this doesn't satisfactorily explain the upward trend in graphics processor average selling prices.

Fortunately, NVIDIA addressed that in its presentation as well, in the following slide:

Image source: NVIDIA.

In the leftmost portion of the above slide, NVIDIA defines a "game load index," which appears to be a measure the required graphics performance to play games at 1920-by-1080-pixel display resolution (the most common resolution among gamers, per the Steam Hardware Survey) at 60 frames per second (the most common display refresh rate among gamers).

The idea is that, over time, the processing power required for a computer to run the modern "triple-A" titles of the day at 60 frames per second using a 1920-by-1080-pixel resolution has gone up as games become relatively more performance intensive.

Additionally, NVIDIA says in the slide that 81% of gamers are interested in virtual reality-based gaming and that those gamers appear to buy a relatively richer mix of graphics processors.

So, the increasing graphical intensity of "triple-A" titles coupled with the potential growth in virtual reality seems to be an interesting potential average selling price driver for NVIDIA.

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