The bad news just doesn't seem to be stopping for Nvidia (NVDA 0.87%). The graphics cards specialist received another big blow last week after the U.S. government imposed restrictions on sales of data center chips to China, Hong Kong, and Russia.
NASDAQ: NVDA
Key Data Points
According to a filing with the SEC, Nvidia reported that the U.S. government has "imposed a new license requirement, effective immediately, for any future export to China (including Hong Kong) and Russia of the Company's A100 and forthcoming H100 integrated circuits." The restrictions will also apply to future Nvidia products that match or exceed the performance of its A100 chips, as well as systems powered by such chips.
Nvidia stock cratered on the news, as China is reportedly a big market for the company. The tech giant slashed its fiscal third-quarter revenue guidance by $400 million thanks to the restrictions. The company was anticipating $5.9 billion in revenue in the current quarter, pointing toward a big drop over the prior-year period thanks to the weakness in the gaming segment.
The data center business was one of the bright spots for the company, with year-over-year growth of 61% to $3.8 billion. But the restrictions could knock the wind out of the data center business' growth.
In all, it is a difficult time to be an Nvidia investor. The stock is down 53% in 2022 and could head lower as the company is contending with multiple headwinds. But investors shouldn't forget that Nvidia stock has appreciated 220% in the past five years despite bouts of volatility and has handsomely beaten the broader stock market.
That's why it may be a good idea for savvy investors to look into the future and see where Nvidia may be after five years, as this could help them decide whether to buy this tech stock while it is beaten down.
The data center business could explode over the next five years
The gaming and the data center businesses will continue to be the pillars of Nvidia's growth over the next five years. However, the company is exploring new areas within these niches that could supercharge its growth.
Nvidia is known for its data center graphics cards but is now making progress in data processing units (DPUs) and central processing units (CPUs) as well -- two areas that could unlock a massive growth opportunity for the company.
Nvidia is expected to start sampling its third generation of DPUs, the BlueField-3, this year to tackle artificial intelligence and analytics workloads. These are programmable networking devices that offer a mix of general-purpose computing along with accelerators to speed up tasks. The DPUs also reduce the load of a server CPU by taking on networking and storage functions, thereby improving the efficiency of server processors.
What's more, Nvidia is already working on its fourth generation of data center DPUs that are expected to be released next year.
It is not surprising to see why Nvidia is looking to establish its dominance in the DPU market. CEO Jensen Huang believes that DPUs are likely to be deployed within every data center in the world by 2026 to accelerate workloads.
Meanwhile, Nvidia is preparing to take a chunk out of the lucrative server processor market as well. The first servers powered by Nvidia's Grace data center CPUs are set to hit the market in the first half of 2023. Nvidia hasn't tapped the server processor market so far, a space that's dominated by the likes of AMD and Intel. That's why the company's move into this market could be a big deal, especially considering that the server processor market is expected to generate $42 billion in revenue in the long run.
The overall data center accelerator market is expected to clock annual growth of nearly 39% through 2027, hitting nearly $70 billion in revenue at the end of the forecast period. So Nvidia could see itself in a stronger position to tap into this huge opportunity over the next five years with a broader product portfolio.
An emerging catalyst that investors shouldn't miss
Nvidia's gaming business is in a tight spot right now thanks to an oversupply of graphics cards. However, the company is taking steps to reduce its dependence on gaming-related hardware with the help of cloud gaming.
The cloud gaming business is expected to generate $22 billion in revenue by 2030, growing at an annual rate of 57% through 2030. The market's impressive growth will be driven by fast internet speeds and lower costs as compared to purchasing gaming titles and hardware, as well as a growing selection of titles that gamers could stream to their devices. Nvidia is already in a terrific position to take advantage of cloud gaming, as it has built a solid user base with its GeForce Now service.
The chipmaker had generated $12.5 billion in revenue from the video gaming business in fiscal 2022. This means the potential size of the cloud gaming business in the long run and Nvidia's estimated revenue share of 60% in this market suggest that this emerging segment could move the needle in a bigger way for the company in five years.
All this indicates that investors may want to keep a close eye on Nvidia and consider going long if the short-term weakness sends the stock price lower, especially considering that analysts are still upbeat about its long-term prospects and expect 22% annual earnings growth for the next five years.
