How does Nvidia make money?

Nvidia is a company which makes graphics cards and they are most popular in the tech industry. Nvidia derives its revenue primarily from selling their chips to the gaming industry, but they also make money through licensing fees and research contracts. In this blog post, I will serve to give you the full ins and outs and to answer how does Nvidia make money as a whole! Nvidia earns gamers’ trust by developing new technologies that give them an edge over opponents, Nvidia’s competitive advantage in the market means it can charge a premium price for its products. They also have a reputation of being one-stop solution providers, with solutions tailored to different target markets like gaming as well as professional computing use cases like deep learning or virtual reality. Be sure to subscribe to our blog for additional details and information.

How Does Nvidia Make Money and What Is There Primary Sources of Free Cash Flow?


1. Products


The main source of Nvidia’s revenue comes from the sales of their graphics processor chips and the licensing of their core technologies. Their technology is a crucial part of their business, because most companies that use their chips pay them a royalty on the base price that they sell the products to. This model of payment allows Nvidia to maintain a low gross margin, which comes in at 58%, but still make a significant profit.


2. Chips


Nvidia also makes a significant amount of money selling chips to other companies as well, mostly through its licensing program. These other companies use their chips in their own hardware and software, which is how Nvidia makes money with them. This is also the same method that Apple uses to make a profit on the iPhone, iPads and Mac products they sell.


3. Products – Apple


Just like Nvidia has business relationships with many major technology firms and chip manufacturers, Apple sells their products using the graphics processors that are produced by Nvidia. This is an ideal relationship for both companies, since Apple gets the graphics processing that they need while Nvidia gets the licensing fees.


4. Hardware Sales


Nvidia also have sales of products made by other manufacturers through their partnership program. These products come in many shapes and sizes, including televisions, gaming consoles and smartphones.


5. Licensing


The third main source of revenue comes from licensing its technology to other companies who use it for their own hardware and software products. This is a key source of revenue for Nvidia, since they do not have to pay royalties for the use of their technology.


6. Government Funded Research


Nvidia is also one of the top recipients of research funding from the United States government, receiving nearly $18 million in 2012-2013 alone. This is to allow Nvidia to continue and improve on their research projects, which help them develop new products and improve their performance.


7. Online Sales


The final source of revenue for Nvidia comes from the sale of its chips through online stores like Amazon and New Egg. These sales provide a small additional income stream, but not enough to make up for the lost revenue from sales through other channels.


8. Government Relations


Nvidia has been criticized by many of the major actors in the technology industry, who claim that its main source of profit comes from its patent portfolio. These patents allow Nvidia to charge royalty fees for each chip that uses them, which makes up most of its revenue.


9. Nvidia’s Future Outlook


Nvidia is currently used by many large firms in the technology sector, including Apple and Dell for their graphical processing needs. This is a good sign for Nvidia and their future, as it indicates that they are likely to continue producing more products that need graphics processing and continue to receive government grants for their research.


Competitive Advantages


1. Direct Revenue


How Does Nvidia Make Money?Nvidia’s relationship with the gaming industry is a long-standing one. The company began designing chips for gaming consoles in the 1980s, and was one of the first companies to develop chips for PCs. The current generation of graphics cards is a product of an agreement between Nvidia and technology giant Intel that created a joint venture called Nvidia-Intel Corp., which allowed them to sell chips together.



Nvidia faces little competition from other chip vendors as it develops products for specific markets, this means that the market for GPUs is dominated by a number of firms. In addition, Nvidia has exclusive licenses from multiple game companies which restricts its access to comparable products from other competitors.



2. Strategic Alliances


Nvidia has a number of strategic partnerships with firms like Intel, Sony, and Microsoft which allows them to gain access to these markets. Two such partnerships include the one mentioned above with Intel, which is aimed at providing the CPU and GPU in a single package. The other is with Sony for their video gaming console. In this partnership, Nvidia provides the GPUs for all PlayStation consoles starting from the PS2, as well as for all PS4 consoles.

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3. Licensing/Research Contracts


The company derives revenue from agreements and licenses entered into with other firms that range from joint ventures to patent licensing agreements to research contracts and grants. Nvidia’s most notable deals with firms include the partnership with Intel, which was meant to increase the performance of PCs and was valued at $1.2 billion. To access this market, Intel is required to adopt Nvidia’s chips in their hardware, products like the i5-7600K processor have been fitted with a GPU off-the-shelf from Nvidia



Other licenses that Nvidia has include ones relating to Linux and open source projects. One such example is their agreement to assist AMD in porting their Open Compute Project open source platform for high performance computing. Nvidia also has a long-standing relationship with Toyota which is aimed at developing new simulation software to test the safety of vehicle designs.



Licensing revenue is expected to rise in the coming months, with the expiration of a patent licensing agreement earlier in 2016. A few firms like Qualcomm and Samsung have signed up for Nvidia’s newest patent portfolio licensing program. The program gave them access to Nvidia’s entire portfolio at a price of $273 million for the first year, rising by 5% every year after that.



4. Performance and Growth Prospects


Nvidia has performed well over the past few years, it’s revenue grew by more than 27% from 2012 to 2013, becoming one of its best performing quarters ever. This growth is expected to continue, according to analysts at Cowen and Company, the company will see revenue rise by more than 20% from 2016 to 2017.



Investors seem to agree as Nvidia and its stock price have been on a march upwards for the past few years and are currently valued at over $17 Bil dollars. In addition, the company has a potential of bringing new products into their portfolio by a combination of licensing deals with companies like Apple that utilize their technology for the iPhone.



One such deal is the one between Nvidia and Qualcomm for their patent portfolio for more than 15 years which allows Qualcomm to utilize Nvidia’s GPU technology in high-end smartphones. Nvidia also has a deal with Apple which allows them to use certain parts of their technology in the upcoming iMac Pro.



Licensing revenue is expected to rise in the coming months, with the expiration of a patent licensing agreement earlier in 2016. A few firms like Qualcomm and Samsung have signed up for Nvidia’s newest patent portfolio licensing program. The program gave them access to Nvidia’s entire portfolio at a price of $273 million for the first year, rising by 5% every year after that.



5. Government Relations/Political Influence


Nvidia has a long-standing relationship with government bodies that allow it to do business on a national level and enter into contracts with various countries by using their technology for defense purposes and products.



For instance, the company has signed agreements with the United States Air Force to develop applications that leverage their technology. It also has an agreement with NASA to provide chips for the spacecraft.



6. Mergers and Acquisitions


Nvidia has been involved in a number of mergers and acquisitions over the past few years, one of which was the purchase of a firm called Icera Inc for $367 million. The company makes software for smartphones which could help Nvidia gain access to new markets by developing solutions for Android devices as well as iPhones and iPads. Icera was purchased towards the end of 2011 and integrated with another firm called LTE Advanced Pro, which was also acquired by Nvidia soon after it acquired Icera.



In addition to Icera, Nvidia has also purchased over 100 patent portfolios from other firms through their licensing program. Some of these include portfolio agreements with IBM and Dell for computers, as well as agreements with a number of companies for television sets, gaming consoles and laptops. Nvidia has also worked on a patent cross-licensing agreement with Microsoft which allows them to use their processors in their Surface devices.



7. Shareholder Value


Nvidia shares were traded at a price of $87.15 in 2010, today they have risen significantly over the past few years by more than 450%, which is why they are currently valued at almost $17 billion dollars despite only having been around for less than ten years. In 2015, Nvidia’s market cap reached almost $12 billion dollars, but it has since fallen to around $10 Billion.



Nvidia’s stock price has risen over the past two years thanks to their product offerings and the increasing demand for its technology by new companies in emerging markets. The company is expected to maintain this trend as they begin to enter new markets like Indonesia and China which have a combined population of 2.6 billion people and a growing middle class with numerous disposable incomes.



In addition to this, Nvidia also plans to bring out new products like those they announced at CES 2017 which include smartphone-enabled auto-pilot systems and televisions with built-in virtual surround sound capability along with HDR support.



8. Company’s Financial Health


Nvidia reported a net income of $277 million for the quarter ending on 2016-09-30 with an earnings per share of $0.19, in comparison to the same quarter one year ago which had an EPS of $0.18, this represents a growth rate of 6.84%. This is due to the increasing demand for graphics processing units (GPUs), which is their main source of revenue and profitability, as well as its other products like Tegra Processors and other technologies related to deep learning.



Nvidia’s gross margin is around 58%, this is because most of its revenue comes from technology sales, which are mainly based on their patent portfolio. However, the company does make some money from the licensing of its core technologies, which it does not have to pay royalties for. The main reason Nvidia is able to maintain a low margin on their products is because they make most of their profit from licensing and other payments from firms that use its chips in their own products.



In addition to this, Nvidia had cash and cash equivalents worth $4.87 billion dollars on 2016-09-30, up from $2.42 billion one year earlier. This cash is mainly used to fund new product research, as well as licensing deals, like the ones mentioned above as well as acquisitions of smaller firms.



9. Intrinsic Value/ Fairness


Nvidia’s intrinsic value can be estimated using a discounted cash flow model based on an analysis of the company’s growth prospects, profitability and margins and its government relations/political influence among others . The DCF analysis produces an intrinsic value of just over $8 per share for Nvidia which represents a downside of 27%.



One of the key drivers of Nvidia’s valuation is the price of their chips, which account for $2.6 billion in revenue. The growth in this revenue shows that Nvidia is likely to continue growing its value and increase its market share over time and justify a higher valuation.



10. Company’s Financial Health- Key Ratios


Nvidia is currently trading at a price to earnings ratio of 29 which means that they are trading at a ratio of 29 times their annual earnings, in comparison to the average S&P 500 Enterprise Value/earnings (EV/EBITDA) ratio of just 17.79 over the past 10 years. The EV/EBITDA ratio is an important measure of a company’s financial health and ability to sustain their profits on the long term.



One of the main indicators of Nvidia’s financial situation is its operating margin, which sits at 25.6%. This indicates that they are able to maintain profit margins in excess of 25% through the operations of their business.



Conclusion, Final Thoughts On How Does Nvidia Make Money?


Nvidia’s business model is a critical part of the company’s ability to sustain themselves for the long term. It allows them to make money from multiple sources, which means that they are able to continue growing and generating profits in excess of 25%.


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