Nvidia (NVDA -1.84%) stock's rapid surge this year has been all about artificial intelligence (AI), which is not surprising as the adoption of this technology alone has created massive demand for the company's data center graphics cards.
This explains why the semiconductor company's data center revenue surged an amazing 171% on a year-over-year basis in the second quarter of fiscal 2024 (for the three months ended July 30, 2023) to $10.3 billion. The segment accounted for 76% of the company's top line, which tells us how big a role the data center business is playing in Nvidia's growth.
The AI-fueled growth of Nvidia's data center business means that this sector is under the spotlight, and that's not surprising as it is likely to drive outstanding long-term growth for the company. Investors, however, shouldn't ignore the progress that Nvidia is making in yet another segment as it could turn out to be a huge catalyst for the company in the long run.
Gaining traction in the massive auto market
The automotive business may not be moving the needle in a big way for Nvidia now as it produced just under 2% of the company's total revenue last quarter, but it could turn out to be a key catalyst in the long run. That's because Nvidia sees a $300 billion revenue opportunity in this space, and its automotive revenue has already hit a $1 billion annual revenue run rate.
The company posted $253 million in automotive revenue last quarter, which was a 15% jump from the prior-year period. Nvidia attributed the year-over-year growth to an increase in demand for its Drive Orin system-on-a-chip (SoC) that powers autonomous vehicles, virtual cockpits, and infotainment systems in cars.
Nvidia's automotive business should continue to get better thanks to the growing usage of semiconductors in cars. The chipmaker sees an opportunity to provide its hardware to 100 million vehicles annually. At the same time, Nvidia says it sees an opportunity to sell its automotive software to hundreds of millions of autonomous vehicles.
This explains why the company is looking to offer comprehensive solutions to automakers and component suppliers that include both hardware and software on a single platform. Nvidia's Drive Thor platform, which is slated to go into production in 2025, is a move in that direction as it will eliminate the need to have separate computers for powering separate functions in a car.
Drive Thor will integrate functions such as digital infotainment, advanced driver assistance systems (ADAS), virtual cockpit, driver monitoring, and others, into a single chip. This will enable automakers to reduce the costs involved in deploying multiple chips to power different applications.
Signs of accelerating auto revenue
The good part is that Nvidia has already struck multiple deals to deploy its Drive automotive platform, which explains why the company was sitting on a design win pipeline worth $14 billion in March this year. A design win happens when a company's chips are selected by customers to be deployed in their products, which means Nvidia's pipeline should positively impact its financial performance once its customers' products enter production.
Nvidia expects to convert this pipeline into revenue over the next six years, which would translate into an annual revenue run rate of just over $2.3 billion. That would be more than double the company's current automotive revenue run rate. More importantly, Nvidia's automotive design win pipeline increased by $3 billion from March 2022 to March 2023, indicating that more customers are designing systems based on its platform.
It won't be surprising to see Nvidia's automotive revenue pipeline expanding further in the long run given the huge addressable opportunity pointed out earlier, and the fact that semiconductor usage in vehicles is growing at a faster pace than before. Nvidia points out that its automotive revenue has increased at a compound annual growth rate (CAGR) of just 10% over the past five years. The segment's revenue increased from $641 million in fiscal 2019 to $903 million in 2023.
The company has already generated $549 million in revenue from the automotive segment in the first half of fiscal 2024. So, Nvidia could record 20%-plus growth in this business this year based on its revenue run rate so far. The discussion above indicates that it could maintain -- or even exceed -- this pace in the long run.
As such, it won't be surprising to see the automotive business moving the needle in a bigger way for the company in the long run. After all, even the data center business was a small spec for Nvidia at one time, generating just $339 million in annual revenue back in fiscal 2016. That business produced $10.3 billion in revenue in the previous quarter alone thanks to AI.
As such, investors would do well to keep an eye on Nvidia's progress in the automotive business as it could turn out to be another big catalyst for the company and complement the impressive growth it is witnessing in other areas.
