Nvidia’s Gaming revenue in Q4 came out sharply down again (-46% year-on-year) as the company is navigating an unprecedented inventory correction related to the post-pandemic video gaming slowdown (and, to a lower extent, the collapse of demand for crypto mining cards) and is still facing tough quarterly comparisons.
Even if the top-line figure was uninspiring, there were many positives about gaming in the Nvidia report and earnings call. Notably Nvidia CEO confirmed that the inventory correction is now largely behind us, that the newest generation of gaming graphics cards (Ada Lovelace architecture) is off to a strong start and that there were signs of demand recovery in China following the reopening. Accordingly, the company delivered a Q1 guidance slightly above expectations, with some help as well from a resilient Data Center division performance. While Nvidia’s Gaming revenue will face again tough comps in Q1, the situation should become much better as soon as Q2 with revenue growth likely to get close to or even re-enter positive territory.
It’s not only Nvidia. Other gaming hardware makers such as Corsair (headsets, accessories) surprised on the upside recently and showed improving top-line trends and Sony increased its PS5 shipment forecast for the current fiscal year to 19 million from 18 million. This illustrates in our view that supply chains challenges are easing and, more importantly, that inflation is not destroying demand for highly priced discretionary items such as game consoles and graphics cards.
Turning to gaming software, the tone has also been constructive in recent days after the initial Ubisoft and Electronic Arts disappointments, with Activision and Roblox delivering quarterly figures well above expectations.
While some investors voiced concerns about the future of virtual worlds in recent months, Roblox blew them away with a robust 17% growth in Q4 bookings and 19% growth in daily active users (DAUs), and a surprising acceleration in January metrics with bookings up 19-21% and DAUs up 19%. Roblox was initially aimed at kids, but is now also well on track to attract a more mature audience, as illustrated by its bookings for 17-24 year olds that grew 34% and accounted for 22% of total bookings. The trend should keep going as Roblox multiplies activities for young adults (virtual concerts, social events…), helping position the company as a top Metaverse destination going forward.
Also worth noting, the Roblox top-line growth came with a sharp margin improvement with a Q4 EBITDA margin of 20%, roughly double the margin in previous quarters, showing the significant operating leverage that can be achieved in the industry.
Finally, it clearly emerged from the various earnings calls that gaming hardware and software will be a major beneficiary of the rise of Generative AI. While Nvidia and AMD provide the computing for training and running AI (Nvidia CEO spent most of the earnings call talking about the AI opportunity), game software makers will rely on Generative AI to speed up development and reduce costs of their titles. Generative AI is also expected to open 3D content creation (apparel and accessories for lifelike avatars, furniture, entertainment venues…) to non-professional users, bringing user-generated content to the next level.
In conclusion, we believe that the recovery is on track for the gaming industry with little impact so far from the macro. A return to “normalized” growth (= pre-Covid levels), current margin strength and potential AI benefits over time could sustain sector valuations going forward.
