The $150 billion chance for the expert in graphics chips is software.
Shares of Nvidia (NVDA 2.47%) have risen 60% year to date, despite demonstrating slowing growth last year as the macroeconomic challenges accelerated through the end of 2022.
Despite the fact that Nvidia reported a 21% year-over-year decline in revenue in the most recent quarter, there are three factors that knowledgeable investors are aware of that show the company is poised for further development.
The story is not just about the data center
Nvidia focuses on providing a variety of products to various markets in addition to selling powerful graphics accelerators to cloud service providers. Nvidia provides a wide range of goods, including processors, networking interconnects, and other networking parts, as well as software, systems, apps, and services. This provides the business with numerous avenues for expansion across its four business sectors, which include data centers, gaming, expert visualization, and automotive.
Purchasing the stock is basically placing a wager on economic digitalization. To name a few use cases, businesses use Nvidia’s solutions to simulate factory operations, find financial fraud and apply automation. This is the main reason for its extraordinary growth over the past ten years and why there will be more growth in the future.
This year, Nvidia management anticipates significant development.
According to Nvidia’s advice, recovery is already in sight. The fiscal year’s first quarter, which runs through April, is expected to see a sequential increase in the gaming and data center industries. That would maintain the tempo in gaming, which grew 16% sequentially in the fourth quarter of the fiscal year (ended Jan. 29). It also portends a speedy recovery for the data center industry, which reported a 6% sequential drop in revenue last quarter.
The recent COVID-19 disruptions in China hurt Nvidia’s data center business, but China’s economic recovery will transform this headwind into a positive catalyst.
Additionally, Tesla was recently mentioned by Citi expert Atif Malik as a potential catalyst. Elon Musk, CEO of Tesla, reportedly told analysts at the company’s recent investor day conference that the company is working to “by an order of magnitude” increase the capabilities of its neural training system for its electric cars by the end of this year. The analyst anticipates that this will increase demand for Nvidia’s data center processors.
Software is Nvidia’s greatest asset.
A significant investment by Nvidia in software has increased its addressable market opportunity and, more significantly, strengthened its competitive advantage. For years, it has offered free software downloads for its gaming GPUs, but offering software services to businesses may soon overtake that as the company’s primary growth engine.
Investors believe that Nvidia’s Omniverse Enterprise for metaverse applications and AI Enterprise software (for example, training AI models) represent significant possibilities. Customers develop a closer bond with Nvidia once they purchase its devices and install its software.
These software programs are available from Nvidia for a yearly subscription charge or a licensing fee. Although the opportunity is still young, management believes that the addressable market for its software will approach $150 billion. The opportunity might seem overstated, but when you take into account the fact that an annual subscription for Nvidia AI Enterprise can cost thousands of dollars per chip socket, not just per customer, the annual sales opportunity adds up fast.
Based on this year’s profits estimate, the company appears to be expensive, trading at a lofty price-to-earnings ratio of 52 (more than double other top semiconductor stocks). However, it is clear that the business has plenty of room for expansion. Nvidia continues to be among the top growth tech stocks to keep an eye on for this reason.
