Nvidia (NVDA -10.01%) investors are probably a worried lot right now as the graphics card specialist sounded out a dire warning about its near-term prospects thanks to a fall in the demand for graphics processing units (GPUs) used in gaming PCs (personal computers).
The tech giant's revenue for the second quarter of fiscal 2023 increased just 3% year over year to $6.7 billion. That's a huge miss compared to the company's original revenue expectation of $8.1 billion. The massive shortfall in Nvidia's revenue is a result of weak PC graphics card sales, which led to a 33% year-over-year decline in its gaming revenue last quarter.
The bad news is that Nvidia expects the headwinds to continue in the short run, which isn't surprising given the sharp decline in PC sales. Savvy investors, however, may want to hold on to Nvidia stock and even buy more if it slides on account of the gaming market's weakness. Let's look at three reasons smart investors could remain bullish on Nvidia.
1. The gaming segment's weakness should be temporary
This isn't the first time that Nvidia's gaming business has run into trouble. The decline in demand from cryptocurrency miners had wrecked Nvidia's gaming segment in fiscal 2019, with revenue declining 45% year over year in the fourth quarter. The drop in cryptocurrency-related demand created an oversupply of graphics cards in the market at that time, leading to lower prices.
A similar scenario is unfolding now, but investors shouldn't miss the forest for the trees. The demand for gaming GPUs is expected to increase at an annual pace of 14% through 2026, driven by an increase in the number of gamers and upgrades to new hardware. The number of gamers is expected to hit 4 billion by 2030 as compared to 3 billion currently.
At the same time, the computing capacity of graphics cards is expected to increase as games become more immersive and life-like, and the proliferation of new technologies (including those linked to the expansion of the metaverse) will create the need for more powerful GPUs. More specifically, the computing capacity of graphics cards is expected to increase threefold by 2024 as compared to last year, which would require gamers to upgrade their hardware.
Nvidia has a massive installed base of over 250 million gaming GPUs, and a big chunk of them are yet to upgrade to the latest chips. All of this explains why the demand for gaming GPUs should remain healthy in the long run. What's more, Nvidia is in a solid position to benefit from the secular growth of this space as it controlled 81% of the gaming GPU market in the first quarter of 2022. So, Nvidia's gaming slowdown isn't here to stay forever.
2. The automotive business is stepping on the gas
Nvidia's automotive revenue jumped 45% year over year last quarter to $220 million. This segment may be a small part of Nvidia's overall business right now, but it could move the needle in a big way for the company in the future since it could keep growing at a terrific pace.
The chipmaker sees an addressable revenue opportunity worth $300 billion in the automotive market, driven by multiple tailwinds such as an increase in the levels of automation, digital cockpits, electric vehicles, and data center infrastructure, among others. The good part is that Nvidia has built a healthy pipeline of design wins worth $11 billion for the next six years that should drive the growth of its automotive business.
These design wins should translate into actual revenue once Nvidia's automotive customers start making vehicles in which its platforms and chips are supposed to be deployed. It is worth noting that Nvidia has struck partnerships with major automotive players in different niches. The company says that it is working with 20 electric vehicle manufacturers, seven trucking companies, eight robotaxi providers, and 30 data center infrastructure providers supporting the automotive business.
The likes of Volvo, Lucid, Hyundai, Mercedes-Benz, Tata Motors' Jaguar and Land Rover brands, and Chinese automotive companies such as BYD and DiDi form a part of Nvidia's impressive automotive design-win pipeline, which is likely to get bigger in the future thanks to the huge opportunity the company sees in this segment.
3. Nvidia's data center business will keep growing at a terrific pace
Nvidia's data center business impressed once again last quarter with 61% year-over-year growth to $3.81 billion. This was Nvidia's largest source of revenue, producing 57% of the top line, and it should continue to be a massive growth driver for the company.
The demand for data center accelerators such as GPUs, server processors, and data processing units that Nvidia sells is set to boom in the long run to tackle growing workloads related to artificial intelligence and machine learning, among others. The data center accelerator market is expected to generate $46 billion in revenue by 2026. That would be a huge jump over the 2020 revenue of $4.8 billion.
Nvidia already dominates the data center GPU market, and it is set to enter the server processor market with the launch of its Grace CPUs (central processing units) in the first half of 2023. This entry would unlock a multibillion-dollar growth opportunity for Nvidia and accelerate the company's growth in the long run.
Given all these tailwinds, it is not surprising to see why analysts expect Nvidia to clock close to 25% annual earnings growth over the next five years. In all, smart investors should consider buying more of this tech stock in case it slides in the short run as the three key catalysts discussed above could help Nvidia deliver healthy long-term upside.
