Jon Peddie Research issued a report on the trends in shipments of discrete graphics chips during Q4 2012. According to the report, add-in board shipments declined a whopping 17.3% Q/Q against a 10-year mean of down just 0.68%. On a Y/Y basis, this represented a 10% decline in unit shipments, which appears to be the second worst Q3 -> Q4 change in the last 10 years. This is obviously not good for either Nvidia's (NASDAQ:NVDA) or AMD's (NYSE:AMD) discrete graphics businesses, but there were some interesting points in the report that I believe are worth commenting on.
The Macroeconomic Environment Is Terrible
The report was quick to note the following caveat:
However, this is just one quarter in a very turbulent year, and the worldwide economic conditions are just too uncertain, so this quarter can't be used as a prediction of the future.
Obviously it's been a bad year for the PC space and, besides the hard disk drive folks, the stocks involved in this sector are significantly underperforming the broad indices:
While I believe that tablets are certainly eating into sales of the lower end PCs, it doesn't make sense that higher end PC sales, especially high performance discrete GPUs would be cannibalized by tablet sales -- these are not substitute goods.
So, I think that the idea that a big chunk of it is macro certainly holds water, but the report also mentioned something else that, I believe as a gamer, is closely related to the real culprit.
Jon Peddie Says "Integrated", I Say "Console"
There is this prevailing notion that integrated graphics processors from AMD and Intel (NASDAQ:INTC) will eat into discrete graphics sales from AMD and Nvidia. This is certainly true, but I believe that this has less to do with the advancement of integrated graphics solutions and more to do with the fact that the bar has been set so low by the game consoles (game developers' baseline target) on the graphical intensity side of things. Keep in mind that the Xbox 360 and the PlayStation 3 have essentially the equivalent to mid/high end GPUs from the year 2005, coupled with a mere 512MB of RAM (my phone has more...) and a weak IBM PowerPC processor.
Game developers have certainly optimized their games like crazy thanks to the fact that the console cycle was so long and low level access to the hardware enables them to get every last drop of juice from it. On the PC, there's API/software overhead, so it takes a bit more power to get the same level of "effective" performance. But eventually, the laws of physics kick in and the game developers just can't stretch their creative juices much more on current hardware before ROI just becomes absurdly sub-optimal.
While game developers ran into a brick wall, the integrated graphics solutions from both Intel and AMD got to the point where in terms of raw power, they blew the doors off of what an Xbox 360 or PlayStation 3 could do, and so games actually have been starting to work pretty nicely on these fairly weak processors. (Compared to a discrete GPU.) Naturally, this caused a couple of things:
- The folks that would usually upgrade their graphics cards every year or two were now finding it harder to justify an upgrade to more powerful hardware, thanks to the fact that their hardware could already run the console-designed games at quality levels far beyond what the console could do
- For more casual gamers, the integrated graphics in mainstream laptops, as well as even the higher end Android tablets, now essentially offer console-quality gaming just thrown in for "free", mitigating the need to go "bigger"
- The add-in board GPU landscape actually seems quite boring, with the only real "new" thing coming from either of the vendors is the $999 GeForce Titan from Nvidia. While this will sell well (believe me, despite that outrageous price tag, Nvidia will sell every single one that it makes), this will hardly move the needle when it comes to the general gaming population sitting out until a new upgrade is needed.
Fortunately, I believe the new console cycle will help. The new Sony (NYSE:SNE) PlayStation 4 comes with a graphics chip roughly equivalent to today's $250 AMD Radeon 7850 (or about a GeForce GTX 660 for those of you that think in Nvidia terms). I expect Microsoft (NASDAQ:MSFT) to provide similarly capable hardware. What this will do is raise the baseline for the graphics performance needed to play the latest PC games (which are mostly ported from console), and for quality levels beyond the console, even higher end performance will be required, thus sparking an upgrade cycle in the GPUs, particularly in the upper mid range of the cards.
Integrated graphics on the CPUs from Intel and AMD will, of course, not be able to compete with what's in the PS4/Next Xbox, and that will close the door on the "good enough" argument that currently exists for the mainstream PC gaming population.
So bad macro, coupled with the stagnation in the game consoles, I believe had an adverse effect on the add-in board market during 2012. My bet is that the trend reverses as both the macro improves, and then the discrete GPU business gets a real boost when the new consoles raise the bar significantly on what kind of graphics horsepower is needed for the next generation of games.
Disclosure: I am long NVDA, INTC, AMD, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.