Nvidia‘s (NVDA -2.94%) fiscal 2023 second-quarter outcomes (for the three months ended July 31, 2022) point out that the graphics card specialist is struggling following years of terrific development.

The chipmaker already warned that its numbers would fall manner behind expectations because of the weak point within the gaming section. The corporate reported $6.7 billion in income on Aug. 24, which was a rise of simply 3% over the prior 12 months. Non-GAAP earnings fell 51% year-over-year to $0.51 per share, pushed by an enormous contraction within the firm’s margins on account of stock changes and decrease common promoting costs (ASPs) of graphics playing cards.

The steering was additionally disappointing. Nvidia anticipates $5.9 billion in income this quarter, together with an adjusted gross margin of 65%. The corporate’s income steering fell $1 billion in need of Wall Avenue’s estimates. Moreover, Nvidia’s forecast for the present quarter factors towards a 17% year-over-year contraction in income. The adjusted gross margin is anticipated to drop by two share factors in response to the corporate’s steering.

There isn’t any doubt that Nvidia traders can be disillusioned with the best way issues are unraveling for the once-high-flying chipmaker. However savvy traders would do effectively to control the larger image, because the gaming weak point should not final lengthy. On the identical time, Nvidia’s newest earnings convention name revealed that it’s making terrific progress in an space that might supercharge it in the long term.

The cloud gaming enterprise is taking off

Nvidia CFO Colette Kress stated on the convention name that its GeForce Now cloud gaming service has greater than 20 million subscribers. This was the one reference Kress made to the cloud gaming enterprise on the decision, however traders should not miss the importance of this quantity.

Nvidia had 10 million GeForce Now subscribers in April 2021. The speedy development of Nvidia’s cloud gaming service is not shocking, because it provides players the flexibility to play resource-intensive video games with out having to shell out cash on costly {hardware}. In cloud gaming, video games are run remotely in information facilities and are transmitted to customers’ gadgets with the assistance of a quick web connection.

This eliminates the necessity for high-end gaming {hardware}, as even players with underpowered gadgets can play high-end video games this manner. For instance, players can subscribe to Nvidia’s GeForce Now RTX 3080 membership for $19.99 a month. This subscription will enable them to stream video games from servers powered by the corporate’s RTX 3080 graphics playing cards, which have a beginning worth of $700.

Customers can play video games in quad-high definition (1440p) decision at 120 frames per second on their PCs utilizing this membership with out having to spend a ton on {hardware} or the gaming title. The comfort of cloud gaming has made this idea a success amongst players.

In accordance to a survey of U.S. players commissioned by Amdocs earlier this 12 months, 62% of players are both utilizing cloud gaming companies or intend to. What’s extra, 78% of the players surveyed have been prepared to pay $10 a month for cloud gaming, whereas 44% can be prepared to pay $20 a month if they may get a bundled 5G reference to the service. What’s extra, a whopping 82% of the respondents have been prepared to surrender on buying gaming {hardware} and undertake cloud gaming.

All of this explains why the cloud gaming market is anticipated to hit $22 billion in income by 2030, in comparison with simply $244 million in 2020, rising at a compound annual price of 57%. Nvidia is in a strong place to take a giant chunk out of this $22 billion alternative. Let’s examine why.

Nvidia can money in

Newzoo estimates that there have been an estimated 21.7 million paying subscribers for cloud gaming in 2021. The variety of paying customers is anticipated to almost triple to 58.6 million by 2024. Meaning Nvidia has already constructed a strong place for itself within the cloud gaming area, as its spectacular subscriber base gave it an estimated market share of over 60% final 12 months. What’s extra, Nvidia’s income share of the cloud gaming area additionally stood at an estimated 60% in 2021.

Nvidia is taking steps to make sure that it maintains its dominance over this area. A technique of doing that’s by constantly increasing its cloud gaming library. The corporate added 80 new titles to the GeForce Now library final quarter, together with common video games equivalent to Genshin Influence and Mass Impact Legendary Version. The service now has greater than 1,350 titles, indicating that Nvidia is including video games to its library at a pleasant tempo — the service had 1,000 titles a 12 months in the past.

So if Nvidia can keep its dominance over the cloud gaming market by the top of the last decade — which it appears able to given its main place within the gaming graphics card market, in addition to its increasing library — it might clock terrific income development from this section in the long term. For example, even a 50% share of the cloud gaming market in 2030 might assist Nvidia clock $11 billion in income from this area contemplating the $22 billion alternative on provide.

That might be a giant leap over the $1 billion income that Nvidia reportedly generated from GeForce Now final 12 months, giving traders but one more reason to be upbeat concerning the long-term prospects of this tech big regardless of the near-term headwinds.