NVIDIA's Gaming Segment Is Growing Again

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NVIDIA (NASDAQ: NVDA) stumbled into the year after seeing sales of its gaming graphics cards fall off a cliff in the fiscal fourth quarter, caused by too many cards sitting in the channel inventory following the collapse of the cryptocurrency market last year.

Management initially guided in November that it would take a few quarters to sell through the excess supply and get gaming back to growth mode, and that process seems to be mostly complete. In the fiscal first quarter, gaming revenue was down 39% year over year but grew 11% over the previous quarter. Management sees gaming fully normalizing by the second or third quarter.

Meanwhile, the underlying dynamics of the gaming business seem strong. Sales of gaming laptops are exploding, and NVIDIA's new Turing RTX graphics cards are gaining industry acceptance as the new standard for the next generation of games. Overall, there are three signs NVIDIA's largest business segment is returning to growth.

A laptop computer with a video game displayed on the screen and a video card laying to the side with the words GeForce RTX lit in green light.
A laptop computer with a video game displayed on the screen and a video card laying to the side with the words GeForce RTX lit in green light.

Image source: NVIDIA.

1. Fast growth for gaming laptops

The fastest growing hardware in the gaming industry is not the Nintendo Switch or Sony's PlayStation 4. It's NVIDIA's Max-Q gaming notebooks.

Last year, it was difficult to gauge the actual growth coming from PC gamers, since cryptocurrency miners were in the market for the same cards. The most reliable indicator that NVIDIA's gaming business was still healthy was the growth in gaming notebooks, which saw soaring demand last fall, with sales up 50% year over year in China.

In a world of smartphones and tablets, PC gamers are looking for a thin, portable device that runs the latest games. Because of this need, gaming laptops have been gaining wider adoption for several years. Global sales soared from around $1 billion in 2013 to around $12 billion in 2018.

NVIDIA's Max-Q notebook design has been a leader in this market that allows original equipment manufacturers (OEMs) to pack a lot of graphics processing power into a sleek form factor that is lightweight. The number of new Max-Q notebook models in production this year is double that of last year.

Because of these trends, CEO Jensen Huang sees a big year ahead for gaming laptops: "This year, we have some hundred notebooks that are being designed at different price segments by different OEMs across different regions. And so, I think this year is going to be quite a successful year for notebooks."

2. Ray tracing is gaining industry acceptance

During the call, CFO Colette Kress said, "The content ecosystem for ray-traced games is gaining significant momentum."