Nvidia Might Be The Best Way To Play Virtual Realty That's 'Just Around The Corner'

• The share price of NVIDIA Corporation (NASDAQ: NVDA) has risen by 12.37 percent year-to-date.
• Macquarie’s Deepon Nag has maintained an Outperform rating and price target of $26 on the company.
• Nag believes that the discrete graphics market is witnessing robust profitability growth and that NVIDIA has “created a sustainable technology advantage” at the higher end of this market.

The growth in the enthusiast segment of the discrete graphics market has been driving profitability growth, and Nag expects the consumer virtual reality launches, expected in 1H16, to accelerate the growth of this segment of the market.

According to the Macquarie report, however, “integrated CPU vendors are capturing much of the value in the low-end of the market, as well as investing heavily in capabilities. As a result, the discrete graphics market has been flattish on a revenue basis, and declining on a unit basis for several years.”

Despite this decline, NVIDIA has been able to generate growth in its discrete graphics revenue by a CAGR of 8 percent over the past five years, driven largely by market share gains. Given that the discrete graphics market has grown at a CAGR of 9 percent during the same period, Nag expects the “higher-margin enthusiast class graphics continue to grow at a healthy rate.”

While the enthusiast segment of this market accounts for only 6 percent of its volumes, it accounts for about 60 percent of NVIDIA’s discrete graphics profits. “As a result, we believe that even small levels of growth in the high end of the market can drive significant growth in NVDA’s profitability,” the report said.

The adoption of high-end virtual reality is expected to add to the company’s EPS estimates for FY17.

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