Nvidia (NVDA 0.01%) has been one of the hottest stocks on the market this year. Share prices of the semiconductor giant more than tripled in 2023, thanks mainly to the surging interest in artificial intelligence (AI)-related stocks.
But what if you'd bought the stock before its AI-fueled rally started?
Let's say someone bought $1,000 worth of Nvidia shares at the beginning of 2020, well before the AI hype of the past year began. That investor would be sitting on price gains of more than 660% and that $1,000 investment would be worth $7,630. Another way to describe the growth would be to say Nvidia stock has risen more than sevenfold since the beginning of 2020.
Those impressive gains can be attributed to more than just the enthusiasm for anything AI. Let's take a look at the growth drivers that have sent this chipmaker soaring since the beginning of the decade and check if they could help this tech stock sustain its momentum in the future as well.
The gaming and data center businesses have been pillars of Nvidia's growth
Nvidia's revenue has grown at a breathtaking pace from 2020 to 2023. The company reported revenue of $10.9 billion for fiscal 2020 (which ended on Jan. 26, 2020). That figure jumped to an impressive $27 billion in fiscal 2023 (which ended on Jan. 29, 2023).
Nvidia's annual gaming revenue increased from $5.5 billion in fiscal 2020 to $9 billion during this three-year period, clocking a compound annual growth rate (CAGR) of almost 18%. However, the gaming business has seen its ups and downs. Sales of gaming graphics cards that power personal computers (PCs) jumped impressively in 2021 and 2022 thanks to the novel coronavirus pandemic.
As people stayed at home to avoid spreading the virus, sales of gaming hardware such as graphics cards surged. Nvidia's gaming revenue jumped to $7.7 billion in fiscal 2021 and then to $12.5 billion in fiscal 2022. It fell to $9 billion in fiscal 2023 as oversupply struck the PC market and sales of graphics cards plunged.
The data center business, on the other hand, has enjoyed outstanding secular growth. Nvidia's revenue from this segment has surged from just under $3 billion in fiscal 2020 to a record $15 billion in fiscal 2023. It is worth noting that the company's data center revenue in the first six months of fiscal 2024 stands at $14.6 billion, suggesting that it could generate significantly higher revenue from this business this year.
What's worth noting here is that Nvidia is now primarily a data center company, as it generated 76% of its revenue from this segment in the first six months of fiscal 2024. The gaming business produced 18% of overall revenue during the same period. For comparison, gaming accounted for half of Nvidia's revenue in fiscal 2020, while the data center business was relatively small at 27% of the top line.
But the bottom line is that these two segments remain the heavy lifters for Nvidia. Together they accounted for a significant chunk of the company's revenue for the past three years. That's why it would be a good idea to take a look at where these segments are headed in the future.
What does the future look like for Nvidia's key businesses?
Starting off with gaming, the good news for Nvidia is that revenue is again on a growth path. Gaming-related revenue increased 22% year over year in the previous quarter to $2.5 billion. The impressive year-over-year growth was a result of stability in the PC market as well as a large installed base of Nvidia's existing graphics card users, who are currently in an upgrade window.
Nvidia CFO Colette Kress believes that gaming GPU demand is now back following last year's slump. Market research firm TechNavio estimates that the gaming GPU market could grow at an annual rate of 16% through the end of 2027, jumping from an annual revenue of $30.5 billion in 2022 to $64 billion in 2027.
Nvidia is in a solid position to make the most of this secular growth opportunity since it controls 80% of the discrete GPU market. Throw in the fact that Nvidia could also win big from the nascent cloud gaming market where it is currently the dominant player, and it is easy to see that the gaming business is built for growth in the long run.
Similarly, the data center business is sitting on a massive catalyst in the form of AI. We have already seen that the company's data center revenue shot up remarkably this year, and the trend is likely to continue as demand for AI servers increases. After all, Nvidia reportedly controls more than 80% of the market for AI chips, which is expected to clock 29% annual growth through 2030 and generate $304 billion in annual revenue at the end of the forecast period. Not surprisingly, Nvidia's AI-related revenue is expected to jump at a terrific pace in the long run.
All this explains why analysts anticipate outstanding growth in Nvidia's earnings over the next three years.
NVDA EPS Estimates for Next Fiscal Year data by YCharts
As the chart above indicates, Nvidia's earnings could jump to $20 per share in fiscal 2026. Multiplying that by the company's five-year average forward earnings multiple of 41 points toward a stock price of $820 after three years, which would be an 80% jump from current levels. So a $1,000 investment in Nvidia right now could be worth $1,800 in three years, which is why investors looking for a growth stock should consider buying it before it jumps higher.
