October 18, 2021

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This Catalyst Could Give Nvidia Stock a Big Boost

The video gaming industry has been a big catalyst for Nvidia (NASDAQ:NVDA) in recent years, helping the company clock terrific revenue and earnings growth and boosting its stock price as gamers have lapped up its powerful graphics cards to elevate their gaming experience.

The good news for Nvidia investors is that graphics card demand is going to boom in the coming years, and the company is in a solid position to take advantage of that thanks to its dominant market share. However, there is an additional catalyst that could give Nvidia’s video gaming business a big shot in the arm over the next few years: cloud gaming. Let’s take a closer look at the cloud gaming market, and check how Nvidia is looking to make the most of this multibillion-dollar opportunity.

NVDA Chart

NVDA data by YCharts

Cloud gaming adoption is growing rapidly

Newzoo, a provider of market research and analytics for video gaming and esports, estimates that the global cloud gaming market is on track to generate $1.6 billion in revenue this year, with the number of paying users jumping to 23.7 million. That may not look like a big deal for Nvidia right now given that it has generated nearly $22 billion in revenue in the trailing 12 months. However, the pace at which the cloud gaming market is growing means that it could soon reach a point where it moves the needle in a big way for Nvidia.

Newzoo estimates that the cloud gaming market could hit $6.5 billion in revenue by 2024, growing more than four-fold compared to this year’s estimated revenue. The research firm also points out that the addressable user market for cloud gaming could be as big as 165 million by the end of 2021, indicating that there are millions of users out there that could buy cloud gaming subscriptions.

In fact, Newzoo points out that 94% of the gamers it surveyed have either tried cloud gaming already or are willing to try it, which means that the market could quickly expand. Nvidia is becoming a dominant player in the cloud gaming space, which could add billions of dollars to its revenue in the long run.

Person wearing a headphone sitting in front of a monitor.

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Nvidia is pulling the right strings to tap this massive opportunity

Nvidia pointed out in March this year that its GeForce NOW cloud gaming service was nearing 10 million members. This is impressive considering that the service was launched in February 2020 with a subscription costing $5 per month. The company is now offering a premium subscription service priced at $9.99 per month or $99.99 a year.

The introductory $5-a-month subscription will remain available to members who were already on that plan before the new Priority membership was rolled out. This effectively means that the new GeForce NOW customers will increase Nvidia’s revenue per user from the cloud gaming business. It wouldn’t be surprising to see the service gain traction among gamers because of the benefits on offer.

The premium subscription will give gamers access to ray-tracing-enabled games, as well as its deep learning super sampling (DLSS) feature that upscales selected games to a higher resolution for a more immersive experience. What’s more, Nvidia has a library of 1,000 PC (personal computer) games on the GeForce NOW platform, giving gamers a wide range of titles to choose from.

It is also worth noting that Nvidia is rapidly opening new data centers and upgrading the capacity of existing ones to capture more of the cloud gaming market. The company has 27 data centers that enable GeForce NOW in 75 countries.

Another important insight worth noting is that 65% of Nvidia’s 10 million GeForce NOW members play games on underpowered PCs or Chromebooks. Those users wouldn’t have been able to run resource-hungry games without Nvidia’s data centers, which do the heavy lifting and transmit the gameplay to users’ screens. Nvidia says that 80% of the gaming sessions on GeForce NOW take place on devices that wouldn’t have been able to run those games locally because of weak hardware or incompatibility.

This explains why the demand for cloud gaming has spiked substantially — consumers need not invest in expensive hardware, nor do they need to buy game titles separately. They can simply buy subscriptions from Nvidia and choose from over a thousand games that the GeForce NOW library provides.

More importantly, Nvidia is expanding into new markets such as Southeast Asia, while bolstering its presence in other areas such as Latin America and the Middle East. As such, the company’s GeForce NOW subscriber count could keep growing at a fast clip in the future.

Gauging the financial impact

With paying users of cloud gaming expected to hit nearly 24 million this year and Nvidia already having scored 10 million GeForce NOW subscribers, the company has got off to a good start in this market.

The addressable market that Nvidia could tap into is also expected to hit 165 million potential subscribers by the end of 2021, as discussed earlier. If Nvidia manages to corner half of those potential paying cloud gaming subscribers in the next few years and get $100 a year from each subscriber (based on the annual GeForce NOW subscription plan), the company could be looking at substantial annual revenue from the cloud gaming business. This should give investors yet another reason to buy this growth stock that is already winning big in graphics cards and data centers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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