Nvidia (NVDA 2.76%) crushed Wall Street's expectations when it released its fiscal 2022 third-quarter results on Nov. 17, with its record numbers and impressive guidance sending the stock up 8% to a new all-time high post the release.
The latest surge in Nvidia stock seems well deserved as the chipmaker's revenue for the quarter (which ended Oct. 31) jumped 50% year over year to a record $7.1 billion, driven by record revenue in the gaming and data center businesses. The company's adjusted earnings shot up 60% year over year to $1.17 per share during the quarter. Analysts were expecting Nvidia to deliver $1.11 per share in earnings on $6.83 billion in revenue.
What's more, Nvidia's Q4 guidance suggests that its hot growth streak is here to stay. The company expects fourth-quarter revenue of $7.4 billion, up 48% year over year and well ahead of the consensus estimate of $6.86 billion. A closer look at the company's primary catalyst indicates that it can clock such impressive growth rates for a long time to come, which is why investors who have missed the Nvidia gravy train so far should think of jumping onto this hot tech stock before it flies higher.
Let's look at the biggest reason why Nvidia stock remains a buy despite gaining more than 143% so far in 2021.
Nvidia's gaming business is set for long-term growth
The gaming segment was Nvidia's largest source of revenue last quarter, accounting for 45% of the top line. The segment's revenue shot up 42% year over year to $3.22 billion as Nvidia focused on boosting graphics processing unit (GPU) supply to meet the huge end-market demand. Management also pointed out that its laptop GPUs saw a sharp jump in demand from the prior-year period, driven by an increase in sales of high-end laptops.
Nvidia management said on the latest earnings conference call that its latest RTX GPUs are driving the company's "biggest ever refresh cycle with gamers." That's not surprising as Nvidia has been consistently expanding the number of titles supporting technologies such as ray tracing and deep learning super sampling (DLSS) that make games more immersive and engaging. The number of games supporting ray tracing increased to over 200 last quarter, with 125 of them supporting DLSS -- Nvidia's technology that allows gamers to play games with high graphics settings while maintaining high frame rates.
Such technologies are encouraging gamers to upgrade at a rapid rate to Nvidia's latest cards. The company had pointed out at its annual investor day presentation in April this year that 85% of its installed base needs an upgrade to the RTX series cards. That's the reason why sales of its latest Ampere architecture cards ramped up at twice the pace of the previous generation Turing cards.
More importantly, the average selling price of Nvidia's Ampere cards stood at $360 for the first six months after launch, up 20% as compared to the previous generation cards. All this points toward continued growth in Nvidia's gaming business as it stands to gain from a mix of higher graphics card volumes and prices on account of more upgrades.
What's even more impressive is the fact that Nvidia is the dominant force in the graphics cards market with a share of 83%, according to Jon Peddie Research. Given that the discrete graphics card market is expected to register $44 billion in annual sales in 2023 as compared to last year's $29 billion, Nvidia investors can expect sharp growth in the company's gaming revenue.
Pushing the envelope
As gaming is Nvidia's biggest business and presents a huge revenue opportunity going forward, the company is taking steps to ensure that it continues to dominate this space. One of the ways it can maintain a strong grip over the lucrative GPU market is by bringing out better chips, and rumors suggest that it is going to do exactly that in 2022.
Code-named Ada Lovelace, Nvidia's next-generation graphics cards are rumored to be twice as fast as the current cards. The graphics specialist is expected to double the number of cores in the Ada Lovelace cards, which are expected to be based on a 5-nanometer (nm) manufacturing process. Nvidia's current generation Ampere cards are based on an 8nm manufacturing process.
The move to a smaller manufacturing process will help Nvidia increase the computing power and the power efficiency of its next-generation GPUs. That's because the transistors on chips manufactured using a smaller process node are packed together more closely, allowing them to perform more calculations while keeping a tab on the heat generated. More importantly, the move to a more advanced manufacturing process could help Nvidia maintain its technology lead in the GPU space over Advanced Micro Devices.
In all, it won't be surprising to see Nvidia's gaming business continue to play a key role in its long-term growth. Analysts expect the company's earnings to grow at almost 40% a year for the next five years, which Nvidia can achieve thanks to its dominant position in the massive market for gaming graphics cards.