Nvidia Returns to Gaming Roots at CES

At

Nvidia's NVDA CES 2019 press conference, CEO Jensen Huang primarily addressed Nvidia's bread and butter business: gaming. Most notably, he announced the Jan. 15 launch of its mainstream gaming graphics processing unit on the latest Turing architecture: the RTX 2060 for $349. While this price is above prior mainstream iterations ($299 Founder's Edition GTX 1060), the performance of the RTX 2060 is substantially above that of the GTX 1060 and even GTX 1070 FE (which launched at $449), showcasing the superior value proposition Nvidia is bringing to its core contingent of gamers. In fact, the firm noted a third of its GTX installed base is on the GTX 960, 970, or 1060, which bodes well for the prospects of the RTX 2060. We are maintaining our $120 fair value estimate for narrow-moat Nvidia. Despite the substantial sell-off in recent months, we continue to view the shares as modestly overvalued.

In our meeting with CFO Colette Kress, she said recent average selling price increases in Nvidia's gaming segment have been driven by upward mobility along the value stack, rather than straight price increases. Nonetheless, on the November earnings call, Kress cited elevated inventories caused by a cryptocurrency-related hangover as a leading driver for recent gaming GPU weakness, while postulating that the channel would remain bloated for one to two quarters. We think the firm priced its RTX 2060 such that original-equipment manufacturers would consequently cut prices of older graphics cards to accelerate the reversion of channel inventories to a normalized level. Concerning China, Asia-Pacific represents about a third of Nvidia's gaming business with China serving as a meaningful portion of that, per Kress. However, she expects the upcoming Chinese New Year to buoy demand for the firm's latest GPUs.

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