Artificial intelligence (AI) was a massive growth catalyst for Nvidia (NVDA -3.89%) in 2023, as the company's graphics processing units (GPUs) play a key role in helping cloud service providers train large language models (LLMs) and generative AI applications. It's a big part of why Nvidia's data center business took off this year.
When Nvidia released its fiscal 2024 third-quarter results (for the three months ended Oct. 29, 2023) on Nov. 21, the company reported record data center revenue of $14.5 billion, up 279% from the year-ago period. The segment produced 80% of Nvidia's total revenue, and it seems set to move the needle in a big way for the company in 2024 as well. Clearly, it was a huge growth catalyst.
There is another potential catalyst developing in 2024 that could complement Nvidia's data center business: Nvidia's gaming business. The gaming segment was hit hard over the past year thanks to an oversupply of graphics cards caused by a sharp drop-off in sales of personal computers (PCs). The gaming business has regained its mojo, and it could play an important role in powering Nvidia stock's further surge in 2024 and beyond.
Nvidia's gaming business could also benefit from AI
Nvidia's gaming business produced $2.86 billion in revenue in fiscal 2024's Q3, up a whopping 81% year over year. The segment was Nvidia's second-largest source of revenue, accounting for nearly 16% of its top line.
Nvidia CFO Colette Kress credited the resurgence in the gaming business to "strong demand in the important back-to-school shopping season, with NVIDIA RTX retracing and AI technologies now available at price points as low as $299." The company added that the growing library of games that support technologies such as ray tracing has brought back demand for its gaming cards, especially because of the company's aggressive pricing strategy.
But the notable takeaway from Kress' statement above is the deployment of AI in PCs, which the CFO believes could be the next big growth driver for the PC market. According to Kress, "Generative AI is quickly emerging as the new pillar app for high-performance PCs." Third-party research from the likes of Counterpoint Research and Canalys also suggests that AI could turn out to be the next big growth driver for the PC market.
Canalys estimates that the PC market could clock 8% growth in 2024 following a double-digit drop in 2023, with AI expected to reignite this space. Canalys points out that 19% of all PCs shipped in 2024 are likely to have some degree of AI capability. Counterpoint Research, on the other hand, forecasts that shipments of AI PCs could grow at an annual pace of 50% through 2030.
Not surprisingly, Nvidia has already started targeting this potentially lucrative market thanks to its expertise in the gaming industry. The company's RTX series gaming GPUs now bring a slew of AI features to customers, including AI-enabled live streaming that allows customers to change the background and remove noise, AI-accelerated apps for content creation, tools to improve the resolution of videos, and AI-powered gaming for a more immersive gaming experience.
Last month, Nvidia released its TensorRT inference platform for Windows 11 PCs that run on the company's RTX GPUs, which will accelerate the inferencing performance of LLMs such as Llama 2 and Code Llama by up to 4x on users' computers. Nvidia claims that this tool helps accelerate coding, generates AI images faster using LLMs such as Stable Diffusion, and generates answers from datasets.
A huge revenue opportunity lies in this space
The above discussion tells us that AI on PCs could become a big thing in the long run. This bodes well for Nvidia, as running AI applications on PCs will need powerful graphics cards packed with a lot of computing power. We have already seen that Nvidia is leveraging its GPUs to tap the growing adoption of AI in PCs, and this could give the company a big long-term boost in its growth.
For instance, Bloomberg estimates that generative AI-based gaming spending could increase at an annual rate of 80% over the next decade and generate more than $69 billion in revenue. With Nvidia controlling 80% of the market for gaming GPUs, it is easy to see why the company is in the pole position in a developing race to make the most of such multibillion-dollar opportunities.
As such, it won't be surprising to see Nvidia's gaming business sustain its outstanding momentum in the new year and beyond, adding to the already impressive growth the company sees in the data center market. As a result, Nvidia may be able to outpace analysts' expectations going forward, and that could help this AI stock soar higher even after terrific gains this year.
