The semiconductor industry has become one of the most important in the world because advanced computer chips are now standard in a growing list of digitized consumer products. They power everything from computers to smartphones to electric vehicles, and some estimates suggest the sector could be valued at over $1 trillion annually within the next decade.
At the very heart of the industry is Nvidia (NVDA 3.92%), a company that is constantly pushing the boundaries of innovation. While it's known for its graphics hardware expertise, Nvidia is often credited for pioneering artificial intelligence. Over time, it has transformed into a computing platform company, which could drive its next phase of growth.
Nvidia just released its earnings report for the first quarter of fiscal 2023 (Nvidia's fiscal year ends Jan. 30) and revealed another round of blockbuster results. Here's why the stock is a buy right now, despite being down nearly 40% since the start of 2022.
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Strength in diversity
Nvidia breaks its business operations into four segments. Gaming and data centers are the largest business units, together representing 88% of the company's $8.2 billion in total Q1 revenue. These groups have carried the company to the $470 billion market valuation it has today, but two of Nvidia's smaller focus areas could take the baton and drive growth to new heights over the long run.
The first of these two is professional visualization, which grew 67% in the recent quarter and hosts Nvidia's Omniverse platform. The platform allows creators to build virtual 3D environments for a range of purposes like games, the metaverse, and industrial applications. The metaverse is exciting because virtual worlds could change the way we interact socially and professionally as the technology develops, but Omniverse's industrial use is arguably its most intriguing aspect.
What does that industrial use look like? Companies like Amazon (AMZN -2.25%) use the Omniverse platform to build digital twins of its warehouses, allowing the e-commerce company to reconfigure its factory floor and train its worker-robots digitally and with accuracy down to the millimeter. It means Amazon can perfectly model changes before committing to altering the physical environment, saving both time and money. Omniverse also has unprecedented potential for infrastructure planning and even mapping roads for self-driving technology.
The second of Nvidia's smaller business units with massive growth potential is its automotive and robotics segment. This group is home to DRIVE, an end-to-end solution for autonomous vehicles. With the help of Omniverse, Nvidia has developed leading self-driving technology that has been adopted by global automakers like Mercedes Benz, which will roll it out in its 2024 model vehicles. Mercedes is one of 35 different manufacturers that have chosen Nvidia, contributing to a pipeline of future revenue that topped $11 billion in fiscal Q1 2023. There's incredible opportunity here: the self-driving vehicle industry could be worth $2.1 trillion by 2030, making it one of Nvidia's most promising opportunities for future growth.
Another strong quarter
Unlike many other technology companies, Nvidia has managed to deliver profits for investors on a consistent basis even through challenging times like the pandemic and the current inflationary period. In the most recent quarter, the company's non-GAAP earnings per share jumped 49% to $1.36. The non-GAAP result discounts one-time costs like the $1.35 billion charge Nvidia incurred when it couldn't close its acquisition of SoftBank's (SFTB.Y -1.59%) Arm Holdings due to regulatory difficulties, so it's a more accurate measure of how profitable the underlying business is.
Nvidia is also returning a significant amount of money to shareholders. In the recent quarter it allocated $2.1 billion to dividends and share buybacks, which are designed to reduce the number of shares in circulation and in turn organically inflate Nvidia's stock price. The company has authorized a total of $15 billion worth of buybacks in calendar year 2023.
But all of this is driven by Nvidia's continued rise in quarterly revenue, which is maintaining powerful growth rates even as the numbers balloon.
Why Nvidia is a buy right now
Nvidia stock has declined by 45% from its all-time high amid the broader sell-off in the technology sector, and also because of the company's failure to close the $40 billion acquisition of Arm, a leading designer of computer processors. The deal was set to be the largest in semiconductor-sector history and would have given Nvidia sole control over advanced chip architectures suited to new-age technologies like artificial intelligence, which is why the company's competitors as well as regulators were opposed to the blockbuster merger.
Still, Nvidia faces a plethora of multi-trillion dollar opportunities going forward. The semiconductor sector alone is set for a $1 trillion annual value before 2030, and autonomous driving technology has potential opportunities worth $2.1 trillion. But the metaverse could dwarf both of those, with some estimates suggesting the new industry could be worth up to $30 trillion in the next 10 years.
For investors with a long-term focus, the current dip in Nvidia stock could pave the way for strong gains in the future.
