NVDA NVIDIA Corporation

By Dan Gallagher 

The phrase "this time is different" can be a dangerous one in business. Fortunately for Nvidia Corp., it also appears to be accurate.

The chipmaker's last major product cycle for its graphics processors designed for videogaming was a letdown. The performance upgrade for the company's Turing family was considered disappointing relative to the previous cycle's boost -- especially at the higher prices Nvidia was demanding. And relatively few games at the time were using the ray-tracing technology that was the key feature of the Turing line.

To make matters worse, that upgrade came right around the popping of the cryptocurrency bubble in which "miners" were snapping up Nvidia's chips to handle the complex equations that are used to generate new units of currencies such as etherium. That inflated sales in the few quarters before the first Turing chips hit the market in late 2018, then hurt sales when miners later dumped those chips on the secondary market.

The experience proved costly in a couple ways. Nvidia's gaming revenue fell for four straight quarters following the launch, and its highflying stock shed more than half its value during the last three months of the year.

The road looks clearer for the company's newest gaming chips announced earlier this week.

The new family, known as Ampere, offers twice the computing performance of the previous generation, and many more games in the ecosystem have adopted ray-tracing -- including the blockbuster "Fortnite." Nvidia also kept the pricing down on the newest generation. Deutsche Bank analyst Ross Seymore notes that the midrange $500 version of the newest Ampere line offers the same performance as the $1,000 version of the Turing lineup. And this time, there is no crypto-bubble to thwart the supply chain and skew comparisons.

That has led Nvidia to project record videogame-related revenue for its fiscal third quarter ending in October. The forecast calls for a 25% jump from the second quarter, which would amount to a little over $2 billion in revenue for that segment. Analysts expect Nvidia's gaming revenue to surge 28% for the full fiscal year ending in January. Some of that will come from the growing sales of the popular Nintendo Switch console, which uses a central processor from Nvidia. But the Ampere chips are expected to be the main driver, with Stacy Rasgon of Bernstein predicting a "monster gaming cycle" for Nvidia.

Nvidia can afford nothing less. The company's data-center business has grown quickly and made the company a darling on Wall Street, but videogaming remains the company's largest segment, accounting for 47% of its total revenue for the trailing 12-month period ended July. The stock had already surged 127% for the year before its gaming announcement early Tuesday and has picked up another 7% since. That has made Nvidia the second-largest company on the PHLX Semiconductor Index by market value, giving the never-cheap stock a multiple of 58 times forward earnings -- 55% above its valuation ahead of the last gaming cycle.

At this level, another gaming reset would be painful.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

September 03, 2020 07:14 ET (11:14 GMT)

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