The past few years have been a non-stop thrill ride for Nvidia (NVDA -0.03%) investors. After record-setting sales and an all-time-high stock price in 2021, the chipmaker was ravaged by the downturn, losing more than half its value last year. The tide has turned again in 2023, and Nvidia stock has been on fire, up nearly 200%, and the year is far from over.
While demand for the company's flagship graphics processing units (GPUs) fell off a cliff -- caught in the throes of an economic upheaval -- Nvidia wasn't willing to rest on its laurels and wait out the tempest. As it has always done, management was firmly focused on the next opportunity, designing the semiconductors of the future.
Investors may not be fully aware of the magnitude of the opportunity ahead, as Nvidia has multiple markets to drive its future growth. Let's take a look at them.
Image source: Getty Images.
1. Gaming pioneer
For over two decades, Nvidia's claim to fame was the graphics cards that rendered lifelike graphics in video games. The company pioneered the modern GPU back in 1999 and never looked back. While there has always been competition nipping at its heels, Nvidia has never ceded the advantage, spending heavily on research and development to preserve its position as the gold standard in gaming.
Even during the downturn, the company continued to dominate the industry it pioneered. In the second quarter -- even as industrywide demand plunged -- Nvidia held an 84% share of the discrete desktop GPU market, leaving mere crumbs for its rivals.
When the economy rebounds, as it no doubt will, the pent-up demand for Nvidia's state-of-the-art gaming processors will pay dividends, as gamers who have put off getting the latest and greatest graphics cards will make up for lost time.
2. Speeding data around the ether
While gaming historically represented the lion's share of Nvidia's revenue, the company achieved a significant milestone in early 2022 when its data center revenue surpassed its gaming revenue. In the company's fiscal 2024 first quarter, Nvidia generated record data center revenue of $4.3 billion, and the segment shows no signs of slowing.
Nvidia has long been a staple in cloud computing and data center operations, as its parallel processing capability is unsurpassed at accelerating data through the ether. This is evidenced by its client list, which represents a who's who of cloud computing. It includes Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, Oracle Cloud, and more.
The digital transformation is ongoing and continues to gain steam. A recent survey revealed that 89% of board directors say that digital business is now embedded in all business growth strategies, according to a survey conducted by Gartner. Yet, just 35% say they're on track to achieve their digital transformation goals.
That extends not only to businesses, but also to the data center facilities themselves. CEO Jensen Huang recently provided an example, suggesting that a $100 million data center could be upgraded with the latest technology for just $8 million, resulting in 20 times less power consumption. This provides a compelling argument for data center operators to upgrade to the most recent technology.
Since cloud computing is one of the major components of the digital transformation, the ongoing move to the cloud will continue to boost Nvidia's results for years to come.
3. The next generation of artificial intelligence
Nvidia has been making headlines this year for its cutting-edge AI processors, but the company has been preparing for this moment for more than a decade. CEO Jensen Huang explained in a recent interview that he saw the writing on the wall:
We had the good wisdom to go put the whole company behind it. We saw early on, about a decade or so ago, that this way of doing software could change everything. And we changed the company from the bottom all the way to the top and sideways. Every chip that we made was focused on artificial intelligence.
That decision is beginning to pay off. While estimates vary, Nvidia is believed to have "at least 90% share" of the AI chip market, Citi analysts wrote in a note to clients.
Nvidia's lead and first-mover advantage could be extremely lucrative. The advent of generative AI promises significant gains in productivity, but just how large the opportunity is remains to be seen.
Conservative prognostications from analysts at Morgan Stanley put the opportunity at $6 trillion. At the same time, Goldman Sachs suggests that the technology could increase global gross domestic product (GDP) by $7 trillion over the coming decade. Cathie Wood's Ark Investment Management is much more bullish, suggesting that AI software sales could top $14 trillion by 2030.
No matter what the size of the opportunity ends up being, Nvidia is well-positioned to reap the rewards.
Bringing it all together
Nvidia still has substantial opportunities in the gaming, cloud computing, and AI markets. The company signaled that the AI boom had begun, calling for revenue growth of 64% year over year in the current quarter, its highest growth rate in years.
To be clear, Nvidia stock isn't cheap, currently selling for 18 times next year's sales. However, given the magnitude of the opportunity, Nvidia was just named a "top sector pick" by Bank of America analyst Vivek Arya despite the stock's nearly 200% rally, suggesting it has additional upside for investors of 29% compared to Wednesday's closing price.
I firmly believe that Nvidia has a long road ahead, and investors should buckle up for the ride.
