The growth in eSports and the global video game industry is a bullish thesis for Nvidia (NVDA) stock, but the company's reliance on China for the projected increase in importance makes it a bit of a double-edged sword.
Shares of the Santa Clara-based semiconductor maker were down about 3% decline in midday trading Monday, narrowing their losses from the plummet on the open, but still among the biggest losers in the semiconductor index and the broader market.
One of the main issues is a Chinese gaming market that, along with cryptocurrency overhangs, was blamed for slower-than-expected growth in Nvidia's recent earnings reports.
Gaming revenue fell 45% year over year and 46% sequentially in the company's most recent earnings report, weaker than expectations heading into the quarter. For a broader context, the results in the first quarter came in over 12% below the company's historical average.
Along with crypto troubles, "deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for our GPUs" according to CEO Jensen Huang.
He added at the time that this was expected to normalize in coming quarters.
"China's an important market and it's an important gaming market," Huang told analysts. "I have confidence this is going to rebound."
The outlook for China has been pivotal for Nvidia's stock story, as it continues to represent over 50% of total revenues and the adoption of the company's new Turing gaming chips is a key factor in forecasting growth for the company.
For more bullish analysts, a clearing of post-crypto inventory and ramp in spending on GPUs in China, the company's second largest market, has been a crucial data point.
"Over the next several years, we expect the gaming segment to be a growth driver," Piper Jaffray analyst Harsh Kumar said in a note to analysts about one month ago.
While he acknowledged the short-term headwinds, he expected inventory to clear this quarter.
"Longer-term, we expect the gaming segment to grow in the high-single digit range," Kumar concluded. "As a whole, the gaming industry is now the largest portion of the global entertainment business, and over the last several years, worldwide software gaming revenue has tripled from 2007 to 2017 according to the company. Over the next several years, many large, secular trends exist in order to continue to drive the growth of global gaming."
The issue is that much of the secular trends are noticeably regional. According to WePC, China dominates the market by global revenue, more than doubling the spend of Japanese gamers for example.
"China has become one of the largest digital gaming markets in the world and has grown exponentially in the past few years due to the popularity of mobile games and esports in the country," a report from Research and Markets, a Dublin-based market data firm. "The China digital gaming market is expected to expand at a compound annual growth rate of 15.4% during 2018-2023, and reach a revenue of USD 83.79 billion by 2023."
As Statista recently charted global industry revenue to reach about $140 billion by that time, China represents over half of the market opportunity available in the key segment for Nvidia.
With the secular trends in place, it is easy to see why many are bullish on Nvidia's long-term prospects, especially as the company touts a coming rebound.
The issue that is rearing its ugly head on Monday is the fact that President Trump's tweets and trade tactics could delay the expectation for a rebound and temper targets as inroads into the world's goldmine of gaming revenue are potentially closed off by political pressures and consumers carry the weight of the trade war.