Stock in the graphics-chip maker Nvidia has nearly doubled this year, but a new generation of videogame consoles could give it another lift by spurring gamers to upgrade their systems.
Data from the Steam online videogame store, owned by the closely held company Valve, indicates that few PC-based gamers have hardware on par with new consoles that Microsoft (ticker: MSFT) and Sony (SNE) will launch later this year, according to BofA Securities analyst Vivek Arya. Most people play videogames via consoles rather than personal computers, so the new systems—the Xbox Series X and PlayStation 5—are likely to become the new benchmark for performance and game developers.
Microsoft and Sony have their own stores linked to their consoles, so most sales via Steam are to people playing via PCs.
At the moment, roughly half of Nvidia gamers using Steam are using graphics-processing-unit architecture launched by the company in 2016, Arya wrote. Only 10% are using graphics cards that will be on par with the new consoles.
“This implies 90% [plus] of the installed base could become strongly motivated to upgrade to higher [average selling price] current-generation Turing products, and potentially next-gen seven-nanometer Ampere products, once new game consoles launch later this year,” Arya said in the note.
According to Arya’s research, about 75% of Steam gamers use Nvidia graphics chips, compared with roughly 16% who use cards with processors designed by rival Advanced Micro Devices (AMD). The remaining gamers use graphics processors integrated in their central processing unit.
The Xbox and PlayStation are built around AMD chips.
In a weekend research note from Jefferies, analyst Mark Lipacis wrote that he expected AMD would gain market share faster than it has in the past because of problems Intel has encountered in producing so-called seven-nanometer chips. He says AMD could capture 30% of the market share now held by Intel over the next two to three years.
Nvidia is one of the most expensive chip stocks, trading at 52 times forward earnings. Of the 40 sell-side analysts that cover Nvidia, 32 rate the name the equivalent of a Buy, six rate it a Hold, and two have a Sell rating. The average target price is $406.82, which is 9.2% below Friday’s closing level of $447.98.
Arya raised his target price to $520 from $460 and reiterated his Buy rating. He noted, though, that the company’s sales of chips for data centers could come under pressure in the October quarter given what Intel and others have described in reporting their earnings.
Shares of Nvidia fell 0.6% to $445.34 in Monday trading, as the PHLX Semiconductor index retreated 0.5%.