This ain't your grandpa's Nvidia (NVDA 4.18%) anymore. And the new version is a monster.
Nvidia isn't playing games anymore
Ten years ago, Nvidia was all about gaming. Sure, the Nvidia Tesla high-performance computing card had been available since May 2012 and the third-generation model was just around the corner. But that was just a sideshow in 2013, and management didn't even bother to break out the financial results for data center products in its earnings reports back then. Nvidia had one operating segment, and it was almost exclusively about graphics processing units (GPUs) for desktops and laptops.
Fast-forward to the spring of 2018, and the seeds of a new strategy were starting to bloom. In the first quarter of fiscal year 2019, which Nvidia reported in May 2018, the gaming segment accounted for 54% of total revenues but the data center segment was already the second-largest contributor with a 22% revenue share.
And you could smell the bright future of artificial intelligence (AI) processors in the air.
Here's how Nvidia CEO Jensen Huang presented the results of Q1 2019, five years ago:
At the heart of our opportunity is the incredible growth of computing demand of AI, just as traditional computing has slowed. The GPU computing approach we have pioneered is ideal for filling this vacuum. And our invention of the Tensor Core GPU has further enhanced our strong position to power the AI era.
Five years later: An AI-powered transformation
Here we are in the spring of 2023. The AI boom is catching fire and Nvidia turns out to be one of the biggest winners in that revolution.
The company saw total revenues fall 13% year over year in the first quarter of fiscal year 2024, due to a cyclical slowdown in the gaming department. But data center sales surged 14% higher over the same period and that segment stood for 60% of Nvidia's total revenues this time:
Nvidia's former AI side gig has become its main driver of new business. That enterprise-class opportunity should be a far more stable revenue stream than the fading focus on consumer-grade gaming chips.
As you can see from the long-term trends and Jensen Huang's seemingly prescient comments a decade ago, this shift has been in the works for ages. And if you kept a close eye on this development over the years, you should have seen Nvidia playing a consistent part in the game-changing process.
For example, let's look at the third version of OpenAI's generative pre-trained transformer, or GPT-3. This system ran its training phase on a supercomputer with more than 10,000 Nvidia Tesla V100 processors, working together in a deep learning system built by Microsoft (MSFT -2.91%).
How Nvidia holds an AI advantage in the years ahead
GPT-3 was the basis of the ChatGPT chatbot that took the computing world by storm in recent months. But it was one of those overnight sensations that are years in the making. Nvidia shipped those 10,000 processors in time to train the early incarnations of GPT-3 in 2020. In other words, the hatGPT uproar you see today would not have been possible without Nvidia's help. So you can't call Nvidia an opportunistic newcomer to this market surge. Instead, the company stands ready to continue fueling the AI revolution.
The OpenAI partnership continues and should give Nvidia plenty of AI-based GPU sales in future financial reports. GPT-4 reportedly relies on 100 trillion deep learning parameters, compared to 175 billion in GPT-3. The fifth generation and beyond will almost certainly grow even larger and demand much better data-crunching processors. Nvidia is ready to deliver improved solutions to meet the rising requirements. The venerable V100 chip is still powerful but the more recent H100 model can crunch AI data nearly 10 times faster and also supports superior interconnection features for much larger multi-processor setups.
Nvidia won't be the only supplier in town, but the company has built a comfortable lead and patent-protected technology moat in this early stage. Nvidia's journey from gaming graphics specialist to AI titan illustrates the power of foresight and strategic evolution.
As the company stands on the brink of becoming a trillion-dollar entity, investors should consider how Nvidia's innovative journey may continue to create value in the years ahead. I can't call it a no-brainer buy at this lofty valuation, but Nvidia most certainly deserves a second look if you're on the hunt for high-growth opportunities.
