Artificial intelligence (AI) was key to Nvidia's (NVDA +0.99%) impressive surge this year, as customers lined up to buy its graphics processing units (GPUs) to train their AI models. But AI isn't the only lucrative opportunity the semiconductor giant is tapping into lately.
Nvidia's chips are also being used to improve the efficiency of factories' operations. Well-known automakers like Mercedes-Benz and BMW turned to Nvidia to help them design their factories virtually before starting the actual physical construction. These virtual representations of real spaces are known as digital twins, and they are going to play a central role in what Deloitte calls the fourth industrial revolution.
NASDAQ: NVDA
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Digital twins will be a driving force behind Industry 4.0
Deloitte points out that the fourth industrial revolution -- popularly known as Industry 4.0 -- "is the logical next step in integrating more technology into the production environment in order to optimize production and increase revenue." Digital twins present one of the best ways to improve productivity and operations by integrating technology into the manufacturing process.
That's because digital twins allow companies to design factories, simulate production processes, and even measure how their products might perform before they start building a factory. This allows companies to bring products to launch faster since they will already have seen potential situations virtually where things could go wrong.
Also, digital twins can help optimize the actual production and assembly process by simulating different scenarios and finding the one that best suits that particular factory. Nvidia adds that digital twins can "test for problems and seek improvements through service updates." All this explains why the adoption of digital twins is expected to grow rapidly in the long run.
Market research firm Mordor Intelligence predicts that the digital twin market could generate almost $92 billion in annual revenue in 2028, clocking a compound annual growth rate of 37% over the next five years. That would be a huge jump over last year's estimated revenue of $19 billion. The good part is that Nvidia is already pulling the strings to make the most of this opportunity with its Omniverse software platform, which is aimed at industrial digitalization.
This platform helps customers create digital twins across multiple applications such as warehouses, autonomous vehicles, robotics, and factories. More importantly, Nvidia is already gaining traction in this market.
Mercedes-Benz, for instance, was able to directly coordinate with its suppliers with the help of Nvidia's digital twins, allowing it to reduce its coordination processes by half. Additionally, the German carmaker also saw energy savings of up to 20% in certain processes thanks to the use of digital twins.
All this indicates why Mercedes is looking to deploy Nvidia's Omniverse platform to make virtual copies of more than 30 factories across the world. Similarly, BMW is also adopting Nvidia's digital twins across its global production network. Given the efficiencies that digital twins can drive in the industrial sector, it won't be surprising to see more companies adopting Nvidia's Omniverse platform.
Nvidia could mint big money from this market
Nvidia's professional visualization business segment captures the performance of the company's Omniverse offerings. This is still a small part of the company's overall business. Specifically, Nvidia generated $1.5 billion in revenue from the professional visualization business in fiscal 2023 (which ended in January) -- just 6% of its top line. Also, the company's professional visualization revenue increased at an annual rate of 11% over the last five years.
So, digital twins aren't moving the needle in a big way for Nvidia yet. However, the potential growth of this market indicates that it could eventually become a big catalyst for it. Management sees a $150 billion revenue opportunity in Omniverse enterprise software, which means that it is merely scratching the surface of a lucrative niche.
In all, it won't be surprising to see digital twins complement the already impressive growth that Nvidia has been clocking on account of the booming demand for its processors that are being deployed in AI servers. The company's revenue is expected to jump to $54.6 billion in the current fiscal year from $27 billion in fiscal 2023, and analysts anticipate its earnings to increase at an annual rate of 79% for the next five years.
Nvidia can deliver such terrific growth thanks to its solid position in the AI chip market, but at the same time, investors would do well to keep an eye on the progress it is making in the digital twin space since this multibillion-dollar market could give the tech stock an added boost.
