Nvidia (NVDA +0.10%) is having a terrible year so far thanks to a bunch of headwinds, such as an oversupply of graphics cards in the personal computer (PC) gaming market and sanctions on sales of data center chips to China. But savvy investors would do well to look past the near-term weakness the company is facing right now.
After all, the application of Nvidia's graphics cards has grown across multiple industries over the years, driving terrific growth for the chipmaker. Now, it looks like the automotive market is going to be the next big growth driver for Nvidia that could supercharge the company and help the stock come out of its slump.
NASDAQ: NVDA
Key Data Points
Nvidia's automotive business is gaining speed
Nvidia's fiscal 2023 second-quarter results (for the three months ended July 31, 2022) were disappointing. The company's revenue increased just 3% year over year to $6.7 billion, which was way below its original expectation.
However, the automotive business was a bright spot for Nvidia last quarter. The segment's revenue increased 45% year over year to $220 million, driven by the healthy demand for Nvidia's automotive-focused artificial intelligence (AI) solutions that power vehicle cockpits and self-driving systems. Nvidia's self-driving systems are also gaining traction among electric vehicles, where the company's prior design wins are now moving into production.
The impressive year-over-year growth in Nvidia's automotive business means this segment accounted for 3.2% of its top line. While that may not be huge right now, investors shouldn't forget the data center business was also a small contributor to Nvidia's top line six years ago. The need for massive computing power in data centers led to a sharp increase in demand for graphics cards over the years, and Nvidia capitalized on that opportunity.
A similar story could unfold in the automotive market as well. Nvidia CFO Colette Kress said on the August earnings conference call that the company has built an $11 billion automotive design win pipeline that should ensure the sustained growth of this segment. A design win means Nvidia's systems and chips have been selected by automotive companies for powering their systems. The company should start witnessing revenue from these design wins once they move into production.
Nvidia's automotive growth last quarter is an indication that the company is converting more of its design wins into revenue. The multibillion-dollar pipeline suggests the automotive business is likely to move the needle in a bigger way for the company.
A $300 billion revenue opportunity could turbocharge automotive growth
Nvidia is just scratching the surface of the automotive market. The company's $11 billion design win pipeline could jump substantially in the coming years, as it sees a $300 billion revenue opportunity in the automotive industry.
Another reason why Nvidia's automotive business could get massive in the future is because of its impressive customer lineup. The likes of Mercedes-Benz, Hyundai, Tata Motors' Jaguar and Land Rover brands, Volvo, BYD, Lotus, and Navistar are some of the many companies that have partnered with Nvidia.
It is also worth noting that Nvidia is pushing the envelope of its self-driving systems to boost its automotive prospects. The company just released a new self-driving system known as Drive Thor.
Nvidia says this new system will deliver an eight-fold increase in computing power over the current platform. Even better, the company says Drive Thor will bring together "traditionally distributed functions in vehicles -- including digital cluster, infotainment, parking and assisted driving -- for greater efficiency in development and faster software iteration."
In simpler words, automakers will need just one system to control various functions of cars instead of a dedicated system for each function. As a result, Nvidia says Drive Thor will bring down the cost of deploying autonomous and connected features in a vehicle by reducing weight, the number of cables, and energy consumption. Nvidia expects automakers to integrate this new system in 2025 model year vehicles.
With the global autonomous vehicle market expected to clock 53% annual growth through the end of the decade, and Nvidia already having a solid lineup of automotive customers, its new and upgraded system could gain solid traction. More importantly, it should bolster Nvidia's efforts to corner a bigger share of the $300 billion addressable market in the automotive space and help increase the company's potential revenue pipeline.
In all, it won't be surprising to see the automotive business become the next big growth driver for Nvidia and accelerate the semiconductor giant's growth by complementing the other catalysts it is sitting on. That's why investors looking to buy a beaten-down tech stock should have Nvidia on their watch lists.
The stock is trading at 41 times earnings, which is lower than its five-year average multiple of 58. Any further slip in Nvidia's price could make the stock cheaper and give investors a window to buy a potential long-term winner at an attractive valuation.
