Semiconductor giant Nvidia (NVDA 6.18%) experienced outsized revenue growth this year thanks to the rise of artificial intelligence (AI). The company makes graphics processing units (GPUs), which were initially developed for use with video gaming computers -- but thanks to the power of these GPUs, they're now employed for advanced computing tasks, such as running AI systems.
Nvidia's 2023 success drove the company's shares upward, hitting a 52-week high of $505.48 on Nov. 20. Yet in the days after releasing its fiscal third-quarter earnings on Nov. 21, Nvidia's stock price fell.
Does this dip create an opportunity to invest in this AI stock, especially if you're willing to hold onto shares for the long term? Or does the drop in price signal a possible red flag? A look into Nvidia in more detail can help to answer these questions.
Nvidia's success
Nvidia is in an enviable position as the provider of GPUs used in some of the hottest sectors of the technology industry. These areas include data centers essential to cloud computing, the development of self-driving cars, and the aforementioned artificial intelligence.
Many hot tech fields rely on Nvidia's GPUs, and this situation is fueling the company's colossal revenue growth. For its fiscal third quarter, which ended Oct. 29, Nvidia achieved record revenue of $18.1 billion, a jaw-dropping year-over-year increase of 206%.
The outsized Q3 results were driven by an astounding 279% year-over-year surge in Nvidia's data center sales to $14.5 billion, up from $3.8 billion last year. The segment's revenue jump is due to the rising demand for computer chips powerful enough to support the needs of AI systems, including ChatGPT, which is built on Nvidia's products.
Nvidia's chips are popular because they can quickly and efficiently run the complex mathematical computations performed by AI due to Nvidia's chip architecture. It's a key reason why the United Kingdom's government plans to build one of the world's fastest AI supercomputers using Nvidia's products.
The company is capitalizing on its GPU strength by investing in AI-related technologies. For example, because AI systems are complicated, simply selling chips with powerful processors isn't enough. Clients also need the software Nvidia offers that allow computers to run AI applications.
This software includes Nvidia's new TensorRT-LLM, which enables customers to experience double the inference performance from AI models. Inference measures an AI's ability to correctly make decisions and execute tasks.
In addition, Nvidia partnered with Foxconn to build a new class of data centers it calls AI "factories." These data centers are optimized to meet the complex, data-intensive demands of AI systems.
A challenge for Nvidia
Given Nvidia's exceptional Q3 results, why did the stock drop after the company released earnings? One key factor is the U.S. government's implementation of export controls on semiconductors used for AI. The affected countries include China in an effort to blunt the nation's military ambitions.
Due to the new restrictions, Nvidia's CFO Colette Kress stated, "We expect that our sales to these destinations will decline significantly in the fourth quarter." China and the other affected nations represented up to 25% of data center sales over the past few quarters.
Still, demand for Nvidia's chips remains strong, potentially offsetting any sales loss from China. The company forecast $20 billion in revenue for its fiscal fourth quarter, a substantial jump from the prior year's $6 billion.
Moreover, this is the early stages of AI growth. The artificial intelligence industry is projected to expand from $142.3 billion in 2022 to nearly $2 trillion by 2030.
To buy or not to buy Nvidia shares
Nvidia's AI abilities position the company to thrive for some time as organizations ramp up AI investments over the next several years. This makes Nvidia a good AI stock to own for the long term. Meanwhile, in the short term, the company's revenue is impacted by the temporary drop in sales to China while Nvidia adjusts its products to meet the U.S. government's new export requirements.
Also, some estimates place Nvidia's GPU market share at a commanding 80%. So even as competitors, such as Advanced Micro Devices, attempt to bite into its AI lead, Nvidia is well positioned to continue benefiting from the AI industry tailwind.
Moreover, Nvidia is financially strong. According to its fiscal Q3 balance sheet, the company possessed total assets of $54.1 billion, with $18.3 billion of that in cash, cash equivalents, and marketable securities. Total liabilities were $20.9 billion.
The consensus among Wall Street analysts estimates Nvidia's share price will reach $641.23 in a year. So with the stock's recent price dip, now looks like a good time to buy Nvidia shares for the long haul.
