Shares of Nvidia (NVDA +3.43%) have soared 60% year to date, despite reporting slowing growth last year as the macroeconomic challenges accelerated through the end of 2022.
While Nvidia posted a 21% year-over-year decline in revenue last quarter, there are three things smart investors know that indicate the business is well positioned for more growth.
NASDAQ: NVDA
Key Data Points
1. Data center is only part of the story
Nvidia specializes in not only selling high-powered graphics accelerators to cloud service providers but also selling a range of products to several markets. Nvidia offers many products, such as processors, interconnects, and other networking components, software, applications, systems, and services. This gives the company multiple paths to growth across its four business segments: data center, gaming, professional visualization, and automotive.
Buying the stock is essentially making a bet on the digitalization of the economy. Companies are utilizing Nvidia's solutions to simulate factory operations, detect financial fraud, and implement automation, just to name a few use cases. This is a fundamental driver of its remarkable expansion over the last decade, and why there's still more to come.
NVDA Revenue (TTM) data by YCharts
2. Nvidia management expects strong growth this year
Nvidia's guidance is already pointing to a recovery on the horizon. For the fiscal first quarter (which goes through April), guidance calls for sequential growth in data center and gaming. That would continue the momentum in gaming, which increased 16% sequentially in fiscal Q4 (ended Jan. 29). It also means a quick turnaround in the data center segment, which posted a 6% sequential decline last quarter.
Nvidia's data center business was hurt by the recent COVID-19 disruptions in China, but China's recovery will turn this headwind into a positive catalyst.
Moreover, Citi analyst Atif Malik recently called out Tesla as a possible catalyst. During Tesla's recent investor day conference, CEO Elon Musk reportedly told analysts that the company is working to increase the capabilities of its neural training system for its electric vehicles "by an order of magnitude" by the end of this year. The analyst expects this to translate to more sales for Nvidia's data center chips.
3. Nvidia's trump card is software
Nvidia has made a big push into software, which not only expands its addressable market opportunity but, most importantly, further solidifies its competitive advantage. It's been supplying free software downloads for years for its gaming GPUs, but selling software services to enterprises could become the company's main growth driver.
Investors see major opportunities for Nvidia's AI Enterprise software (e.g., training AI models) and Omniverse Enterprise for metaverse applications. Once customers buy Nvidia hardware and install software on top, it creates a tighter client relationship.
Nvidia sells these software applications as an annual subscription or a licensing fee. It's early in this opportunity, but management sees the addressable market for its software reaching $150 billion. That might seem like overselling the opportunity, but when considering that an annual subscription for Nvidia AI Enterprise can cost thousands of dollars per chip socket, not just per customer, the annual sales opportunity adds up quickly.
The stock looks expensive trading at a lofty price-to-earnings ratio of 52 (more than double other leading semiconductor stocks) based on this year's earnings estimate. But the company is obviously not short of growth opportunities. This is why Nvidia remains one of the best growth tech stocks to keep on your radar.
