Analysis: Nvidia's Virtual Reality Strategy

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Analysis: Nvidia's Virtual Reality Strategy
January 2, 2017

Summary

- Virtual Reality (VR) headsets hold tremendous potential, but anywhere between only 1.4 and 12.8 million units were sold in 2016.

- Most VR headsets are sold for mobile-based devices, and only 4% are sold for PCs.

- Nvidia has developed a “buy the PC and add a VR headset if you wish” strategy to maximize performance GPUs sales to the PC industry.

 

The Virtual Reality Market

 

Nvidia (NASDAQ:NVDA) has become the leading supplier of graphics processors (GPUs) - chips that deliver realistic images for computer games - and has approximately a 70% share. The Virtual Reality (VR) headset market is poised for strong growth, with potential uses in video games, personal media, and videoconferencing. But actual growth is a subject of debate. For example, according to a July article in Fortune:

 

"Analysts are divided over how quickly virtual reality will catch on. At the high end, 20 million units could be sold this year, including all types of VR headsets and accompanying controllers and accessories, according to market research firm Tractica. Neil Schneider, executive director of the Immersive Technology Alliance, came up with a much smaller estimate of 300,000 units in the first 12 months on sale. Cheaper VR hardware that relies on using smartphones and not a PC, such as the Samsung Gear, could sell 10 times as many units, Schneider estimated. And looking out a few years, market tracker Digi-Capital cut its rather optimistic forecast for spending on virtual and augmented reality in 2020 to $120 billion, down from an earlier forecast of $150 billion."

 

Nvidia recognizes the potential of using its GPU chips in VR headsets. Consequently, the company notes on its website:

"Virtual Reality is set to change the way we enjoy entertainment, interact with friends, and get our jobs done. As the leader in visual computing, NVIDIA is at the forefront of this exciting new computing platform. From gaming to product design to cinematic experiences and beyond, NVIDIA delivers groundbreaking solutions for VR-including industry-leading Pascal GPUs, drivers, and SDKs-to meet the needs of professionals, gamers, and developers."

 

According to researcher Jon Peddie: "The Gaming PC segment, where higher-end GPUs are used, continues to deliver growth for PC makers. New gaming content and the promise of Virtual Reality help drive the demand for gaming desktops and notebooks."

 

IDC said that: "Consumer interest in augmented and virtual reality would see 10.3 million units shipped by the end of 2016, although only 100,000 units would be AR versions. By 2020, IDC said that 61 million virtual reality headsets would be shipped-a CAGR of 100.7%."

 

However, a December 18 Reuters article reported that: "brokerage Piper Jaffray will cut its 2016 estimate for sales of VR headsets by 65 percent to 2.2 million units in a yet unpublished report."

 

Gartner is forecasting 1.43 million VR headsets for 2016 and 6.31 million for 2017.

 

Table 1 shows that numbers are all over the place.

Here's the problem. Nearly all the unit growth of VR headsets is going into mobile-phone based devices, and only 4% of unit shipments in 2016 were PC-based are shown in the graphic below:

According to new research from Strategy Analytics: "Global VR headset revenues will reach $895 million in 2016 with 77 per cent of that value accounted for by newly launched premium devices from Facebook-owned Oculus, HTC and Sony. These three brands, however, will only account for 13 per cent of volumes in 2016, as lower priced smartphone-based devices will dominate share of the 12.8-million-unit virtual reality headset market."

 

The VR Market and Nvidia

 

The small percentages of units going into PCs are shared between Nvidia and AMD (NYSE:AMD). Shown in Table 2 below are data for desktop discrete graphics cards. Nvidia held a 70% share of the 9.44 million units sold in Q2 2016.

Mercury Research pegs the market shares differently, and also breaks out market shares for Mobile, as shown in Table 3 below.

In Table 4, I assume one PC with a graphics card per VR headset with an average price of $400 per graphics card based on pricing of Nvidia's GeForce GTX chips (ASPs per chip should drop in 2017 with the introduction of AMD's sub-$350 chip, but for now we can assume $400 per PC graphics card.

 

Nvidia set the minimum requirements for its VR Ready program as a GeForce GTX 970 for desktop PCs and a GTX 980 for notebooks. A GTX 970 currently has a suggested retail price of $329.99, while the GTX 980 is $499.99.

 

Nvidia revenues generated would only be between $16 million to $143 million based on the VR headset forecasts. Interestingly, unit shipments will only be between 0.06 million to 0.5 million.

But VR headsets shipped versus VR-ready PCs are two different things. Nvidia General Manager Zvi Greenstein confirmed during the VRX conference in San Francisco, that system manufacturers shipped 15 million VR-ready PCs equipped with Geforce graphics cards to date.

 

He estimated that the number of Geforce-equipped VR systems is expected to rise to 30 million by the end of next year.

 

I interpret this comment to mean that GeForce-equipped VR PCs at 15 million at the end of 2016 would be an installed based from previous years, and 30 million sold in 2017 would mean that 15 million would be sold in 2017.

 

Based on the above assumptions of $400 per GPU, Nvidia would generate revenues of $6.0 billion for the GPUs in 2017. This is huge compared to the $16 million to $143 million in revenues based on actual VR headsets used with the PCs.

 

For the three quarters of CY 2016, Nvidia reported GPU revenues of $2.7 billion. That calculates to $3.6 million for all of CY2016. At a $400 price tag, that equates to 9 million GeForce-equipped VR PCs. Again, this is huge compared to unit shipments of only between 0.06 million to 0.5 million based on actual VR headsets used with the PCs.

 

Oculus and HTC have both released official recommendations for PC system requirements and interestingly the specs are almost identical, and identical to Nvidia's requirements mentioned above for a desktop GPU.

 

HTC Vive

  • Graphics Card: GeForce GTX 970 or AMD Radeon R9 290 or better
  • CPU: Intel Core i5 4590 or AMD FX 8350 or greater
  • RAM: 4GB or more
  • Video port: HDMI 1.4, DisplayPort 1.2, or better
  • USB port: 1 USB 2.0 or faster port
  • Windows 7 SP1 or newer

 

Oculus Rift

  • Graphics Card: GeForce GTX 970 or AMD Radeon R9 290 or better
  • CPU: Intel Core i5 4590 or greater
  • RAM: 8GB or more
  • Video port: HDMI 1.3
  • USB port: 2 USB 3.0 ports
  • Windows 7 SP1 or newer

 

In 2016, an estimated 258.2 million Desktop and Notebook PCs were shipped, down 6.4% from 2015. For 2017, IDC expects unit shipments to drop by 2.1% to 252.7 million units.

 

The 9 million GeForce-equipped VR PCs in 2016 represents 3.5% of all PCs, while the 15 million GeForce-equipped VR PCs in 2017 will represent 5.9% of all PCs sold.

 

Let's look a bit further to the future. IDC, while forecasting 10.1 million VR headsets for 2016, forecast 61 million in 2020. Base on the same assumptions of an ASP of $400 and 4% of headsets into PCs and a 70% share, Nvidia would sell 2.44 million purposed GPUs and generate $683 million in sales.

 

Investor takeaway

 

Nvidia has developed a strategy of supplying GeForce GPUs, which meet requirements set by Oculus and HTC, to PC suppliers in a "buy the PC and add a VR headset if you wish" approach. In other words, VR headsets will not be a factor in gaming GPUs. The $683 million in 2020 is only a percentage of the $6 billion expected to be generated in 2017 as discussed above. The key to Nvidia's strategy is to incorporate as many VR-performance GeForce GPUs into PCs as possible, irrespective of whether the buyer would have a VR headset.

 

On another point, expect increasing competition form AMD, which is coming out with competitive products at lower prices.

 

"AMD will begin its new FinFET graphics product rollout with its Polaris 10 and Polaris 11 graphics chips later this quarter the company confirmed in a press release. Which will target the sub $350 graphics market. Interestingly, JPR found that only 15% of all GPUs sold are priced at $349 or higher. And of that 15% only 3% are priced at $449 or higher. This means that AMD's Polaris GPUs are aimed at market segments where the volumes are inherently significantly larger compared to Nvidia's GTX 1080 and GTX 1070."

 
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (Written by Robert Castellano).

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