NVIDIA has been building fast graphics for over 2 decades. The last 5 years have seen the company transform itself into a platform company. How did that happen?

The Wild West of 3D Graphics

In 1993, 3D graphics on the PC wasn't even a technology toy. 2D accelerators were either good for vector or bitmap graphics but not both. And real 3D on a PC was still a pipe-dream.  NVIDIA was born in that world with a vision to push the limits of 3D graphics... by definition, on the PC. And for a decade, the company did exactly that with amazing success. By 2003, the company was a major player in consumer, workstation, and motherboard graphics. 

The seeds of the current platform strategy had already been sown. The NVIDIA Quadro business was on it's way to dominate the workstation market and that success was not just because the company delivered fast chips with solid drivers, but because the company was producing software that people referred to as "middleware". Middleware is software which software development companies integrate into their applications to provide a particular functionality.  NVIDIA produced middleware for professional application developers and licensed it to them for free. 

You can see the origins of NVIDIA's current strategy if you can see something akin to a "plaltform" in this combination of professional GPU, drivers, middleware software for application developers, and application developer support. 

The workstation as well as the gaming business benefited from this strategy. When the company introduced programmable GPUs, they extended their free software development to create a GPU programming environment called CUDA. The company had long since ceased to call itself a "chip company". Instead, NVIDIA viewed itself as a company that could help customers solve some of the most difficult visual computing problems in the world. And the strategy of monetizing their expertise through great GPU designs combined with free software was an essential part of this success. 

It doesn't take much imagination today to see how a thoughtful company could reflect on this kind of a success internally and understand the business leverage which could be gained from fomalizing and institutionalizing the platform philosophy across a focused group of high-potential markets. 

Building Solution Platforms for markets with hard-to-solve problems

NVIDIA focuses on specialized, key markets. In each market, there is a compelling problem to solve. The challenges in the market can be overcome with help from solutions which NVIDA can deliver. In each market, the business driver for NVIDIA is more than good hardware. The platform philosophy involves layering hardware, software, and services to create a solution. The platform includes providing the best possible solution at the hardware level.  It also provides a development layer with important tools, development kits, software components (aka middleware) applicable to the market segment, developer support, and even specialized hardware solutions which enable customer solutions.

Four markets are addressed in this way today: the gaming market, the professional visualization market, the market for data centers, and the automotive market.  The strategy works because it leverages the company investment in GPU technology - an investment which is financially important and competitively critical - and applies the benefits of that investment with specialized and highly valuable go-to-market solutions for each of the four markets. 

Et voilà, you have a company which can claim that four key markets represent over 85% of corporate revenues with a annual growth rate of 25%.   That sounds like an attractive business. 

Real Growth versus Potential Growth

Let's be clear. NVIDIA did not grow at 25% in the last fiscal year. The fiscal year 2016 ending last January 31st did see record revenues, excellent earnings, and rising gross margins & operating profits. But year-on-year revenue growth was 7% - a far cry from 25%, isn't it?  If that is true, why should you see a bright outlook for NVIDIA? Why did the stock jump almost 50% in one year when the PC market is in decline?   

NVIDIA is not dependent on the broad PC market. Even at the most basic level, NVIDIA GPUs for gamers aren't going into PCs which are being replaced by tablets. NVIDIA GPUs for workstations has not been affected by the general decline in PC sales.  If and when the day arrives that gaming PCs and workstations decline due to competitive alternatives, NVIDIA is already well positioned with exactly those streaming and data center technologies which may one day be eating into the gaming and workstation markets. 

The secret sauce: excellent GPUs, key technology expertise, and vertical market solutions

NVIDIA is also leading in technologies critical to future growth markets. Virtual Reality, VR, is a technology that touches at least two of NVIDIA's growth markets. VR is in the process of transforming the gaming and entertainment industry. NVIDIA is a leader, and VR demands power graphics. VR is also critical in industrial markets for product design, product development, manufacturing, energy, automotive, aerospace, education and research. NVIDIA's professional visualization products will benefit from this technology trend. 

Artificial Intelligence, AI, and specifically deep-learning, is pushing advances in machine learning which impacts many many industries. It benefits from GPU processing and the technology impacts NVIDIA growth markets in data center solutions and automotive. 

You can now see the structure the company has created. Excellence in GPU technology is combined with expertise in key technologies. These are horizontally oriented advantages which traverse several key growth markets. NVIDIA then leverages those technologies with specific platforms which address vertical-market requirements. 

Got it?  It is logical, simple, and valuable for NVIDIA customers. It is also hard for competitors to duplicate. 

The strategy might appear to be a new one for NVIDIA. It's not. The strategy is thoughtful. The strategy is based on good analysis. The strategy is also an evolution of the winning strategies the company used successfully during the two prior decades.

Let's look at those four growth markets.

Gaming: $2.8 billion in revenue, $20 billion TAM

The Gaming Platform represents more than half of the overall revenue for the company. It has grown in revenue, in units, in average selling price. There is a hype and excitement around VR in games and NVIDIA addresses this directly as part of their Gaming Platform. The company views VR as another technology vector which improves the customer gaming experience and also drives demand for faster gaming solutions.  VR, whether it grows more rapidly or less rapidly, it is certain to expand the gaming market. To this end, NVIDIA provides VRWorks as a specific toolset and part of their GameWorks platform strategy to develop VR in the gaming industry.  

Professional Visualization: $750 million in revenue, $6.5 billion TAM

Professional Visualization is focused on industry. Product development, engineering, manufacturing, energy, architecture, research, education, film, special effects, advertising, professional visualization are included. Essentially, professional visualization touches every company which needs to visualize data and information. It doesn't matter if it is a new car, if it is medical data, if it is a programmed special effect for a new film. All professionals working in these fields require high-fidelity visual information. On one hand, the market is dependent on enterprise spending which is influences by macroeconomic trends. On the other hand, these professional customers will never demand lower quality visual images. In so far as NVIDIA can deliver the tools to make higher and higher fidelity visualization easier, professional customers will have business needs which will use higher fidelity images. For more than 15 years, the company has focused on this same goal. Today, DesignWorks is the new platform to integrate a range of tools from VR-enablement to high-quality, real-time ray-tracing. Making investments to grow the market for everyone makes sense for NVIDIA. The company dominates the market. This is a $750 million per year business. Professional Visualization delivers gross margins well above the corporate average. And NVIDIA possesses unique development skills and software to enable this market. 

Data Center: $339 million in revenue, $5 billion TAM

The Data Center market is served by several NVIDIA technologies and vertical market solutions. Notably, the most powerful super-computers in the world are built on a combination of processors and GPUs. NVIDIA created the CUDA programming environment for GPUs in 2007 and has advanced the programming development environment for GPUs since. Data centers are also the target market for high-performance, remote, virtualized, streaming graphics. This is a critical technology in streaming a high-fidelity gaming experience. It is also critical for providing virtualized, remote workstations for professional users. This cuts across many segments including gaming, product design, visualization, film special effects, as well as professional & consumer VR applications.  Virtualized graphics is a key technology in this market. NVIDIA developed this ability with partners during the last decade and it is now producing industry-changing businesses. Artificial intelligence, especially deep learning, is another technology which is ascending and will have, sooner or later, a significant, positive impact on NVIDIA's data center business. NVIDIA Grid and Tesla products are the GPUs which form the foundation of NVIDIA's data center solutions.

Automotive: $320 million in revenue, $8 billion TAM

Automotive is one of the new markets for NVIDIA with tremendous potential: potential to add value, and potential for profits. While this market segment is new, NVIDIA is no stranger to the car companies. Their Quadro professional workstation team has been working closely with automotive OEMs almost since the day the first Quadro workstation graphics board shipped. These are companies NVIDIA knows well. Specific solutions for automotive companies were first developed around information and entertainment systems. But automotive companies have harder problems to solve. Autonomous driving is one of those problems. An NVIDIA solution leverages the company's work in deep learning and processing of sensor and visual information. Their platform, NVIDIA Drive PX, delivers hardware and software in a functional development platform to assist customers in solving the self-driving problem in their vehicles. NVIDIA has another development platform, NVIDIA Drive CX, which supports the development of modern car cockpit display systems. 

The PW Perspective

NVIDIA knows where it is going. Segmenting business based on vertical market solutions makes sense for the company and for its customers. A side effect is the clarity with which  the company strategy can be told to the investment and analyst community. It explains why the company has not been dependent on the decline in the general PC market and it explains why the company's future is not tied to the woes of the PC market. Finally, NVIDIA has been explaining for years that the company is not a chip company.  Every analyst who understands the company strategy will also understand how just how true that statement is today. 

Supporting data: source: NVIDIA