There are three interesting developments for Nvidia (NASDAQ:NVDA), which I will cover in this article:
- Nvidia is going to license its GPU cores to other manufacturers;
- Electronic Arts (NASDAQ:EA) is going to optimize games for Advanced Micro Devices' (NASDAQ:AMD) GPUs;
- The launch of the new gaming consoles will slowly fade Nvidia's royalties from Sony's PlayStation 3.
Let's cover each of these.
Nvidia licensing GPU technology
Nvidia has just announced that it will be licensing its GPU technology to other players. This is not exactly new, in the sense that there are several competing GPU technologies already being shared/sold within the mobile market and Nvidia itself is already licensing GPU tech to Sony (NYSE:SNE) and Intel (NASDAQ:INTC).
The most notable competitor for Nvidia in the business of licensing GPU technology in the mobile space is Imagination Technologies' PowerVR, which is used among others by Apple (NASDAQ:AAPL) and Intel, though Intel is likely to change that in the next generation (Silvermont) of its mobile chips, going instead with an in-house design.
So what we see here is that while there might be a market for GPU technology, it's clearly not lacking in suppliers or alternative technologies. The most successful licenser, Imagination Technologies, carries a $1.26 billion market cap (it trades in London) and does around $224 million in revenues per year. Imagination Technologies is probably the company with more to fear from this Nvidia move, though it's also a potentially huge victim if Apple ever chooses to use Intel CPUs in its devices, as might well happen in the next two years.
As a matter of comparison, Nvidia has $8.32 billion in market capitalization and had revenues of $4.31 billion in the last 12 months. So if Nvidia were to capture a market as large as Imagination Technologies is capturing now, it would have an impact of around 5.2% in its own revenues. However, it's likely that such revenues would be quite a bit more profitable than Imagination Technologies' since they'd entail no new expenses.
If Nvidia can make this work, it can be a positive for its bottom line, but being as successful as Imagination Technologies is it is unlikely at this point.
Electronic Arts optimizing games for AMD
This was already a risk I had called the attention to with AMD winning the new generation consoles (PlayStation 4 and Xbox One). It will make all the sense in the world for games producers to optimize towards AMD hardware, because that's what their games will be running on when they're running in the consoles. This might well represent an advantage for AMD when selling its discrete GPUs into the PC market, because gamers will know that they're more likely to work well with games that have versions for the consoles.
It is thus not a surprise that Electronics Arts is saying that its Battlefield 4 franchise will be optimized for AMD. More similar announcements are to be expected, and each of them makes it harder for Nvidia. This is thus a negative.
PlayStation 3 and associated royalties will be fading away
As the new generation gaming consoles hit the market, the old generation including the PlayStation 3 will start fading away. Nvidia still has a horse in the old generation, it's still collecting royalties on those consoles. Indeed, it can be estimated that Nvidia collects around $10 per PS3 unit, since when the PS3 had sold 50 million units, Mr. Jen-Hsun Huang, Nvidia's CEO, said that Nvidia had made $500 million in royalties from the console.
With the PS3 still selling around 11.5 million units in 2012, this means that it should still account for around $115 million in Nvidia revenue, and these are very high margin revenues.
While it will take a couple of years for this revenue to fade to zero, at this point that's an unavoidable path. In a way, this revenue will (negatively) compensate emerging revenue from Nvidia licensing its GPU technology and this was probably the reason why Nvidia decided to make that move now.
These developments, one positive, two negative, more or less compensate for each other. So there's little happiness to be gained from Nvidia licensing its GPU tech while at the same time it will see a source of such licensing fading away.
With other factors being negative, such as Intel's increasingly competitive GPU integration and its possible forceful entry into the mobile market, Nvidia remains challenged.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.