Given the events of the past few years, it's a wonder Nvidia (NVDA 6.18%) investors don't have whiplash. As the result of record sales generated in 2021, the stock price surged to an all-time high, only to be pummeled by the downturn, which shaved off half the company's value in 2022.
If that wasn't enough, the rise of generative artificial intelligence (AI) and soaring demand for Nvidia's state-of-the-art processors this year has brought the stock roaring back, up 228% (as of this writing), and currently sits just 3% off its all-time high, notched in late August. If history is any indicator, the thrill ride is just getting started.
While AI is currently hogging the news cycle, that's just the latest in a long line of opportunities that management has recognized on the horizon and pivoted to address. Let's look at three opportunities that could fuel the next phase of Nvidia's growth.
Image source: Getty Images.
1. Shall we play a game?
It's no secret that Nvidia made a name for itself with the introduction of its groundbreaking graphics processing units (GPUs) in 1999. The company dispensed with the boxy images that were the industry standard, rendering lifelike images in their place. This early success was the first of many, and it has continued to out-innovate the competition.
The company's never-ending cycle of research and development (R&D) has kept its rivals at bay. In fiscal 2023 (ended Jan. 29), Nvidia spent 20% of its revenue on R&D, which helps explain why its processors are still the gold standard.
In the second quarter, despite macroeconomic headwinds, the company retained 80% of the discrete desktop GPU market, according to data compiled by Jon Peddie Research (via Tom's Hardware). Still, sales were down 36% year over year, as economic uncertainty remained.
That has continued to weigh on Nvidia's results. Gaming revenue declined 27% year over year in fiscal 2023, though the industry is beginning to show signs of life. In the fiscal 2024 second quarter (ended July 30), gaming revenue was up 11% sequentially and 22% year over year.
As inflation continues to abate, pent-up demand for the company's cutting-edge graphics cards will fuel growth, as gamers (who have been hanging on to their existing processors) will likely go on a spending spree.
2. Nvidia has its head in the clouds
As crucial as gaming revenue is for Nvidia's success, the segment has taken a back seat in recent years to the company's data center segment. The digital transformation has been all the buzz in recent years, accelerating the adoption of cloud computing.
Investors might be surprised to learn that Nvidia's GPUs are an important component in data centers and cloud computing. Their parallel processing -- or the ability to conduct a multitude of complex mathematical calculations simultaneously -- helps speed data around the ether and quickens access with these systems.
That's why most of the high-profile cloud infrastructure providers are Nvidia customers. This includes Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, Oracle Cloud, and many more.
As a result, the data center segment has supplanted gaming to become Nvidia's biggest breadwinner. In the company's fiscal 2024 second quarter, it generated record data-center revenue of $10.3 billion, up 171% year over year, and shows no signs of slowing.
3. You can't spell Nvidia without AI
It's important to note that not all of Nvidia's data center revenue came from the cloud. Much of the surge in demand this year can be laid squarely at the feet of generative AI.
Nvidia long ago staked its claim in artificial intelligence, since the parallel processing that works so well at rendering images and speeding data through the ether works equally well for training and running AI systems. The company was already prepared for this eventuality, as CEO Jensen Huang explained in a recent interview:
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.
As a result of that prescient move, Nvidia dominates the AI machine-learning chip space, controlling an estimated 95% of the market, according to data assembled by New Street Research.
Demand for generative AI is only just beginning, but the size of the opportunity remains up for debate. Analysts at Morgan Stanley put the opportunity at $6 trillion, while Goldman Sachs puts it closer to $7 trillion over the coming decade.
This doesn't include the growing opportunity from logistics automation, robotics, and self-driving cars, which all have the potential to add to Nvidia's AI windfall.
Whatever the case, it is currently cornering the AI chip market, which bodes well for the company and its shareholders.
What it all means
With the massive opportunity across gaming, cloud computing, and AI markets, the sky is the limit for Nvidia. Management currently estimates the company's total addressable market at $1 trillion over the long term. More immediately, the third-quarter outlook is calling for record revenue of $16 billion, representing growth of 170% year over year, helping illustrate the soaring demand for its processors.
I'd be remiss if I didn't point out that Nvidia stock is far from cheap, currently selling for 43 times forward earnings and 15 times next year's sales. That said, given the company's recent triple-digit revenue and earnings growth, its valuation is a fraction of what it was just a few months ago, and will likely moderate further given Nvidia's robust outlook.
If the stock seems too pricey, investors can buy a small amount now and add at better value points when circumstances permit.
Given the company's vast opportunity and management's proven ability to capitalize on emerging trends, I believe Nvidia should be included in every investor's portfolio. Not doing so could be a costly mistake.
