How Does Nvidia Make Money?

Nvidia (NASDAQ:NVDA) generates its revenue primarily from sales of graphic processor units (GPUs). Its largest segment is GPU, which accounted for 87% of total revenues in fiscal 2019, while the other segment, Tegra Processors, contributed 13% to the top line. In this note we discuss the revenue segments of Nvidia, their historical performance, and expected trajectory over the next two years. You can look at our interactive dashboard analysis ~ Nvidia Revenues: How Does Nvidia Make Money? ~ for more details. In addition, you can see more of our data for Information Technology companies here. 

Nvidia Reports Its Revenue Under Two Segments ~ GPUs, and Tegra Processors

• Revenue Contribution As of Fiscal 2019:
  • Graphic Processor Units ~ 87%
  • Tegra Processors ~ 13%

Nvidia’s Business Model

• What Need Does It Serve?
  • Nvidia primarily serves the graphics processing units (GPUs) market, which are high performance processors that generate realistic and interactive graphics on PCs, and notebooks. Nvidia’s discrete GPUs are preferred by gamers and design professionals for high performance and 3D graphics.
  • The company reports its revenues under two segments, GPUs, and Tegra Processors. GPU revenues refers to revenue generated from sale of graphic processor units primarily used in consumer PCs, professional PCs, and data centers. Tegra Processors represents the revenue from products based on Tegra SOC (system-on-chip) and modem processor technologies, which includes Tegra for automotive, including infotainment and navigation systems; and gaming devices.
• Who Pays To Nvidia?
  • PC and notebook original equipment manufacturers, such as Dell, HP, Toshiba, and Sony pay Nvidia for its GPUs. In addition, the company also sells some of its high-end GPUs directly to consumers through retailers such as Best Buy. The company also has a data center division which includes Tesla for AI utilizing deep learning and accelerated computing. Gaming devices manufacturers, such as Nintendo, which uses Nvidia’s SOC module for its Switch console, also pay to Nvidia.
• What Are The Alternatives To Nvidia?
  • Alternative to a GPU is a central processing unit (CPU). However, if both GPU is added along with the CPU, it off-loads the burden of graphics processing to GPUs. In this way, a dedicated GPU and CPU work in tandem to increase the overall speed and performance of a system.
  • Other companies that manufacture GPUs include AMD, Asus, and Intel among others.
  • Alternatives to Nvidia’s dedicated GPU as AI accelerators are AMD’s Radeon Instinct, NEC SX-Aurora TSUBASA, and Qualcomm’s Adreno.

Nvidia’s Total Revenue Has Grown 70% Since Fiscal 2017. However, The Growth Rate Is Expected To Slow In The Coming Years

• Nvidia’s total revenues grew from $6.9 billion in fiscal 2017 to $11.7 billion in fiscal 2019.
• This represents an average annual growth rate of 30.6%.
• We forecast the revenues to be around $12.3 billion by fiscal 2021, reflecting an average annual growth rate of 2.6%.

Revenue Growth Over The Coming Two Years Will Likely Be Led By A Mid-Single-Digit Growth In GPU Revenues, Partly Offset By A Decline In Tegra Processors Business

• The decline in fiscal 2019 can primarily be attributed to lower PC and notebooks sales, which are expected to decline in 2019, amid a shortage of chips. In fact, the global PC shipments fell 5% in Q1 2019, and grew 1.5% in Q2 2019.
• Also, the slowdown in the Chinese economy could impact the sales of its newly launched Turing products. Note that China accounts for roughly 25% of the company’s sales. While the trade war with China didn’t impact the PC sales in Q2, it could impact the sales in the coming quarters.
• However, the situation could improve in 2021, when the company’s new Turing products could see an uptick in sales, partly led by a revival in data center demand, which has been slow of late, as some customers await the launch of the next generation of chips.

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