Despite its stock falling hard during the recent bear market, Nvidia (NVDA +1.67%) as a company has delivered tremendous growth over the last few years, particularly from its graphics processing units (GPUs) designed for gaming and data centers, its two largest sources of revenue.
While the company continues to see new applications for its GPUs that could drive more expansion over the next decade, Nvidia is starting to experience slowing growth from macroeconomic headwinds. But the company's potential growth in "digital-twin" technology -- which provides a virtual representation of a real-world space, or even computer networking architecture, to allow tracking and testing -- could dwarf whatever negatives the economy throws at it in the near term.
Green flag: Growth in this segment is taking off
One important quality of Nvidia that every investor should appreciate is its ability to keep expanding the application of its GPU technology to new markets. Over the last decade, it's gone from gaming and data centers to most recently introducing new AI-driven software systems, including Nvidia Omniverse, a collaboration platform for independent and enterprise software developers.
CEO Jensen Huang has described Omniverse as one of Nvidia's largest graphics opportunities. The acceleration in revenue growth in the company's professional visualization segment over the last year, including results from Omniverse, explains why Huang is optimistic.
The professional visualization segment posted a revenue decline of 13% in fiscal 2021, which ended in January 2021. But this segment has taken off since the unveiling of Nvidia Omniverse in March 2021. Over the three most recent quarters, the segment posted year-over-year revenue growth of 144% (Q3 of FY22), 109% (Q4 of FY22), and 67% (Q1 of FY23).
| Segment | First Quarter of Fiscal 2023 | Change (YOY) |
|---|---|---|
| Data center | $3.75 billion | 83% |
| Gaming | $3.62 billion | 31% |
| Professional visualization | $622 million | 67% |
| Automotive | $138 million | (10%) |
| OEM and other | $158 million | (52%) |
| Total revenue | $8.29 billion | 46% |
Data source: Nvidia. YOY = Year over year.
One opportunity that can keep this segment growing for many years is the investment by businesses in digital tools for advanced simulation, analytics, and fine-tuning of the manufacturing supply chain.
The benefit of using digital models in the product development process is that companies save money, improve product quality, and ultimately boost revenue. Research from McKinsey notes that digital-twin technologies can increase revenue by 10% and accelerate time to market by as much as 50%.
The demand for digital-twin technology is spread across every sector of the economy. However, spending is greatest in manufacturing, which is projected to grow from $590 million in 2020 to $6.7 billion by 2025.
Fortune Business Insights expects spending on digital-twin technology to reach nearly $100 billion by 2029. This dovetails with Nvidia's evaluation. Management has referenced over 150,000 warehouses and 10 million factories in the world today that are shifting to digital tools and automation. That's a lot of factories that could be using Nvidia's software over time.
Red flag: GPUs are not recession-proof
While revenue increased 46% in the most recent quarter, management expects top-line growth to decelerate to approximately 24% in the current quarter. This is due to a $500 million hit from a lack of sales to Russia and COVID-19 lockdowns in China. Even without that revenue shortfall from those unusual events, Nvidia's guidance would call for revenue growth to decelerate to 32% year over year.
Slowing growth will likely weigh on the stock's performance until Nvidia offers a stronger outlook. The following are two factors that could contribute to lower growth in the gaming segment this year.
- The decline in cryptocurrency mining activity, which could lower demand for Nvidia's cryptocurrency mining processors and gaming GPUs used in digital currency mining.
- Macroeconomic headwinds, such as higher prices for goods, squeezing consumers' buying power for pricey gaming chips.
But the stock offers better value
The risks in the short term are somewhat counterbalanced by Nvidia's lower stock price and valuation, which already account for lower growth. The stock entered the year trading at over 60 times earnings per share based on analysts' estimates. The stock now trades at a forward price-to-earnings (P/E) ratio of 28.
Overall, the stock looks like a great value in light of the long-term opportunities in digital twins and data center.
