NVIDIA (NASDAQ:NVDA) is one of the most popular semiconductor companies in the world. Its dedicated GPUs are widely beloved by gaming enthusiasts everywhere, providing the ability to play high end games at extremely high levels of performance. For years, the name 'NVIDIA' was synonymous with gaming. It still is, to a very large extent, but recently AMD (AMD) has been making inroads in the dedicated GPU market. Still, NVIDIA remains the GPU of choice for legions of gamers everywhere.
That's one of the main reasons why many people still don't know about all the different industries NVIDIA is in. Over the years, the company has branched out into a number of different industries, yet its dominance in graphics cards tie its name to that vertical.
The common perception of NVIDIA as "just a semi stock" is not accurate. The company is actually pretty diversified, operating in a number of different verticals including:
- Cloud gaming.
- Car software.
- Streaming media.
- And more.
It's a full suite of products and services that have many synergies between them, which bodes well for NVIDIA. NVDA is a semi stock, but given its diverse lineup of products and services and the meaningful synergies between them, it could become the next great tech conglomerate in the tradition of Microsoft (MSFT), Apple (AAPL), and Alphabet (GOOGL). The company's growth rates and total addressable markets (TAM) also support this thesis. Accordingly, I'll develop a bullish thesis on NVDA in this article, arguing that its new ventures could drive significant future growth. I will briefly touch on three new businesses NVIDIA is getting into, taking a particularly close look at cloud gaming - a new NVIDIA venture that is rapidly rising in popularity.
NVIDIA's Competitive Landscape
The core of my thesis is that NVIDIA's new initiatives give it significant growth potential. However, NVIDIA is still a semiconductor stock at heart, so its position in the semi industry is a key fact we need to understand to evaluate the company's future potential.
With that in mind, here are the basic facts:
NVIDIA is far and away the market leader in dedicated GPUs, with an 83% share of the market according to Jon Peddie Research. That's a dominant market position. If NVIDIA can keep it up, then it should grow. According to MarketWatch, dedicated GPU sales are expected to grow at 7.7% CAGR to 2027. That's a decent growth rate for an entire industry.
As for whether NVDA actually will maintain its lead in GPUs:
That all depends on technical specifications. While NVIDIA is a well known brand, the graphics card industry is not a space where you can count on your brand name to push you to the front. If you look at the kinds of people/businesses that buy GPUs, they include:
- PC manufacturers.
- Gaming console manufacturers.
- Gamers who build their own PCs.
None of these buyers are dumb. If one of NVIDIA's competitors comes out with something that is simply faster/better than an NVDA graphics card, customers will start buying it. In fact, console makers as a whole generally go with AMD graphics cards - so there is at least one sub-sector where AMD is winning. Nevertheless, for the gaming PC market, future growth is likely to come from specs, since that's what buyers are looking for. To see whether NVIDIA still has the edge in tech specs, let's compare the top NVIDIA and AMD GPUs side by side.
| SPEC: | NVIDIA GEFORCE RTX 3090 | NVIDIA GEFORCE RTX 3080 TI | NVIDIA GEFORCE RTX 3080 | AMD Radeon RX 6900 XT | AMD Radeon RX 6800 XT | AMD Radeon RX 6800 XT |
| Clock speed (Ghz) | 1.7 | 1.67 | 1.71 | 2.01 | 2.01 | 1.81 |
| Memory (gigs) | 24 | 12 | 10 | 16 | 16 | 16 |
| Memory type | GDDR6X | GDDR6X | GDDR6X | GDDR6 | GDDR6 | GDDR6 |
So we've got NVIDIA winning on some metrics and AMD on others. AMD advertises a higher clock speed, but NVIDIA's highest end model has far more memory, and all of its top models use a more advanced type of memory than AMD's graphics cards do. GDDR6X memory is 43% faster than GDDR6, so GEFORCE users with a technically slower clock speed may in fact experience better performance than Radeon users. So, NVIDIA is likely to remain the graphics card maker of choice for high end gamers.
New Ventures
Now that we've looked at NVIDIA's position in the GPU business, we can move on to its competitive position in its newer ventures.
In most of the new industries NVIDIA is breaking into, it faces stiff competition. Worth noting are:
- Alphabet's Stadia in cloud gaming.
- Qualcomm (QCOM) and Intel (INTC) in self driving car platforms.
- Alphabet, Apple, Roku (ROKU) and Amazon (AMZN) in streaming media devices.
Let's take a look at where NVIDIA stands in these various industries.
In terms of cloud gaming, GeForce Now seems to be well ahead of Stadia. Sources report that GeForce now has 10 million users, while Stadia only has 1.5-2.5 million. So more people are using NVIDIA's offering than Google's. That doesn't necessarily tell us the revenue picture, but we've got NVIDIA in the lead in adoption.
Next up, we have self driving car platforms. This one is murkier because NVIDIA and its competitors offer differing services. In this space, NVIDIA offers not only processors but an "in-vehicle AI computer," a simulation platform, and a training platform. This is a unique mix of hardware and software that may not be exactly comparable to, say, Qualcomm's offering. As you might expect, market share data for this sub-sector isn't readily available, but Navigant Research released a report that showed NVIDIA leading on various "soft" metrics (vision, product quality etc).
Finally, we have streaming media. NVIDIA offers a streaming media box called Shield, which allows users to stream movies, music and more. It connects to all the streaming services that set top boxes typically do, like Netflix (NFLX), YouTube, Amazon Prime, and so on. One selling feature it has is that it supports GeForce Now cloud gaming - not all streaming boxes support gaming just yet. So NVIDIA is ahead of the curve.
Overall though, NVIDIA is definitely not a leader in set top boxes. According to AppBrain, it has only a 0.04% market share in the space. Certainly, this isn't a huge profit center for the company. But the Shield's built-in gaming functionality makes it worth at least mentioning, because gaming is a space that other streaming companies like Netflix are just now starting to take seriously.
Deep Dive on Cloud Gaming
Having reviewed NVIDIA's business as a whole, we can move on to an in-depth review of cloud gaming. Among NVIDIA's newer ventures, this one is worth focusing on because it has a high user count and could therefore make a large impact on revenue. As covered previously, the Shield seems to be a dud and DRIVE is hard to quantify. GeForce Now, on the other hand, is a pretty established service that could be doing up to a billion a year in revenue. So, if any of NVIDIA's new ventures are going to add to its bottom line, GeForce Now is a top contender.
Here's how GeForce Now works:
In exchange for $9.99 per month, gamers can play their favorite games on any device. The player does need to own the game before they can play it, but revenue from game sales goes to third parties like the Valve Corporation and Epic Games. So, only the subscription fees are relevant to an analysis of NVIDIA.
As of April 13, GeForce Now had 10 million subscribers. That includes both the free tier and paid customers. NVIDIA didn't break down how many customers were free vs paid in its announcement. However, we know that the paid tier costs $9.99 per month. So we can come up with a few possible revenue estimates based on five possible breakdowns.
| BREAKDOWN | REVENUE |
| 0% paid, 100% free | $0 |
| 20% paid, 80% free | $239.76 million |
| 50% paid, 50% free | $599.4 million |
| 80% paid, 20% free | $959.04 million |
| 100% paid, 0% free | $1.189 billion |
So we've got a range of possible outcomes from $0 to $1.189 billion in revenue. And we can narrow it down further. NVIDIA said that both its free and its paid tier had users. So we can cut the first and fifth possibilities off the table above, and narrow it down to a range from $239.76 million to $959 million. From here we can come up with some profit estimates. For example, based on profit margins of 10%, 20% and 30%, we get the following profits from the revenue figures we've hypothesized.
| 10% margin | 20% margin | 30% margin | |
| $239.76 million | $23.9 million | $47.95 million | $71.9 million |
| $599.4 million | $59.94 million | $119.8 million | $179.82 million |
| $959 million | $95.9 million | $191.8 million | $287.7 million |
So assuming that GeForce Now is profitable and its profit margins range between 10% and 30%, it could be doing anywhere from $23.9 million to $287 million in earnings on the service.
With this established, we can try to gauge cloud gaming's impact on NVIDIA's bottom line.
In 2020, NVIDIA delivered:
- $10.9 billion in revenue.
- $3.58 billion in net income.
The GeForce Now estimates we've come up with so far would represent a significant increase over those levels. On the high end, in a scenario where 80% of GeForce Now users are paid, we get to $959 million in revenue. If NVIDIA can turn a 30% margin on that $959 million, we get to $287 million in earnings. The $959 million in revenue would add 8.7% to the 2020 revenue level, and the $287 million in earnings would add 8% to 2020's profit. So there is significant top and bottom line growth potential to NVIDIA just from GeForce Now alone. If we tallied up the possible impacts of all the new businesses the company is getting into, the impact would be much larger.
Risks and Challenges
As we've seen in this article, NVIDIA is a company that has a lot going for it. Between new products, a commanding market position, and strong growth, the company is doing well. However, there are several risks and challenges to this thesis, including:
- A slowdown in innovation. While NVIDIA's market share is large, the semiconductor space is pretty competitive in theory. It's an industry driven by tech specs; if AMD catches up with NVIDIA on tech, and remains cheaper, then it will probably gobble up some of the latter's market share. So NVDA is going to have to keep investing enormous sums of money in R&D going forward if it wants to stay relevant.
- New product failures. The fact that NVIDIA is investing in new products is promising, but it comes with a risk: spending money on failed product lines. If you look at the Shield, for example, its market share in streaming devices is negligible, yet NVIDIA keeps pumping the device to market, sometimes slashing prices to move it. The more money it sinks into products that don't succeed, the less profit it ultimately makes, so failed attempts to break into new product categories could be considered a real risk.
- Shortages. The world is currently in the midst of a chip shortage and as a company that is mainly involved in semiconductors, this affects NVIDIA. The shortages may mean that NVIDIA can charge higher prices, but on the other hand, may also mean that it will not be able to move as much product.
The risk factors above are ones that all investors will have to keep in mind. Nevertheless, NVIDIA is a very high-growth business that has the potential to grow significantly in the next 3 to 5 years. Particularly if its newer ventures pay off, like cloud gaming appears to be doing.
Looking for more investing ideas like this one?
At Betting on Tomorrow, we research technology megatrends to identify future winners. Subscribers get access to our model portfolio along with regular weekly updates from our co-authors.
