Nvidia’s Q3’16 Earnings Review: Gaming, Automotive & Data Center To Drive Growth

Leading GPU manufacturer Nvidia (NASDAQ:NVDA) will report its Q3 2016 earnings on November 5th. Despite a weak macro environment and challenging  market conditions, the company has performed well so far this year, as its strategy of creating specialized application-specific platforms continues to gain traction. These specialized applications include: 1) gaming; 2) enterprise computing; 3) high-performance and cloud computing;  and, 4) automotive infotainment and control. The four segments presently account for 85% of the company’s revenue, up from 68% a year ago. Nvidia has secured a well defined and strong position in each of these growth markets, in the face of strong competition.

In Q2 2016, a contraction in the  PC Original Equipment Manufacturer (OEM) market and weakness in enterprise, high performance and cloud computing offset Nvidia’s strong growth in gaming and automotive processors. The PC market is expected to pick up the pace with the launch of Windows 10 and Intel’s Skylake platform. The weakness in the enterprise, HPC and cloud market is more of a macro issue, and Nvidia is confident of the long-term growth potential of these segments. Nvidia has secured a well defined and strong position in non-PC growth markets, which we believe will help the company sustain its growth momentum in the future.

We will update our $22 price estimate for Nvidia after the Q3 2016 earnings call.

See our complete analysis for Nvidia

New Technologies & Games Will Continue To Accelerate Nvidia’s Gaming Revenue 

Nvidia is witnessing robust growth in its gaming revenue, driven by the expanding gaming market and the continued strength of its Maxwell-based GeForce GPUs for the enthusiast and performance categories.

The company strongly believes that PC gaming is a growing market, and expects the segment to see continued growth in the coming quarters. Key growth drivers for this market include new gaming technologies, such as:  1) 4K (which quadruples the number of pixels to process); 2) virtual reality and Direct X 12; 3) the launch of Windows 10; 4)  new upcoming games; and, 5)  eSports, a social gaming platform. This last driver is notable.  In just a few years’ time, eSports has doubled to almost 100 million gamers around the world, and Nvidia believes that the platform has the capability to double again in the next few years. ^[1] The penultimate driver is notable as well.  Some of the new games up for launch this year are: Rainbow Six, Fallout 4, Black Ops 3, Star Wars, Call of Duty, Assassin’s Creed, Metal Gear Solid, etc.

Nvidia claims that the sales of PC gaming systems this year are estimated at $28 billion, with continued expansion expected in the years ahead. ((Nvidia’s Q2 2016 Earnings Call Transcript, Seeking Alpha, August 6, 2015))

The Automotive Segment Will Fuel Tegra Division Growth

The automotive segment is Nvidia’s fastest growing Tegra processors sub-segment and offers higher gross margins (compared to devices). Automotive electronics is a large market and is going through a transition  as cars have increased computing capability in both the drive train and the dashboard. Increasingly, dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Management indicated that Strategy Analytics expects the market for Advanced Driver Assistance Systems will generate around $15 billion in 2016, with a CAGR of 23%. ^[2]

Nvidia  has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. The company’s automotive platforms remain on a sharp upward trajectory with almost 8 million cars using Nvidia’s technology at present (up from 4.7 million a year ago), and around 30 million more cars are in the pipeline.

Nvidia claims to see continuous momentum in design wins with new as well as existing automotive customers. In addition to its infotainment cockpit business, the company is working with over 50 companies in integrating the NVIDIA DRIVE PX in their autonomous driving efforts.

GPU Accelerated Data Center and Deep Learning Technology Provide An Exciting Opportunity For Nvidia

In the enterprise data center, NVIDIA’s GRID graphics virtualization platform continues to hit key milestones. The company now has over 250 enterprise customers with production deployments, up from just over 30 customers a year ago. In March 2015, VMware, the virtualization market leader, shipped the latest versions of Horizon and vSphere with full support for NVIDIA GRID vGPU technology. More than 400 customers have signed on through the GRID Early Access program.

The Tesla product portfolio continues to benefit from widespread interest in deep learning. A growing number of companies are now using Tesla GPUs for deep learning, including the world’s leading cloud service providers, like Baidu, Facebook, Flickr, Microsoft, and Twitter, as well as a broad range of startups. In 2015, Nvidia claims to have hit a milestone for CUDA, its parallel computing platform, which has now been downloaded 3 million times since its 2006 launch, with 1 million downloads in the past two years alone.

Nvidia expects the deep learning application to further accelerate growth in the professional GPU segment going forward.

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1. Nvidia’s Q2 2016 Earnings Call Transcript, Seeking Alpha, August 6, 2015 [↩]
2. Nvidia’s CEO Discusses F4 Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]