Introduction
In the world of technology, few companies have been as transformative over the past decade as Nvidia (NASDAQ:NVDA). From inventing the graphics processing unit (GPU) to becoming the go-to supplier of AI accelerators, Nvidia‘s chips have underpinned major technological revolutions from PC gaming to machine learning.
Nvidia‘s stock price has reflected this, with incredible gains that have made it one of the most successful investments of the past decade. But with the shares well off their highs and concerns mounting about slowing growth, investors have to ask: Is Nvidia still a good bet going forward?
In this deep dive, we‘ll break down everything you need to know about Nvidia stock. We‘ll analyze the company‘s competitive position, growth opportunities, risks, and valuation to help you decide whether Nvidia is a buy, sell, or hold.
As a digital technology expert who has followed the semiconductor industry for many years, I‘ll aim to provide an informed, balanced perspective. Let‘s get started!
Nvidia‘s Segments and Financials
First, it‘s important to understand Nvidia‘s business and how it makes money. Nvidia reports in two main segments: Graphics and Compute & Networking.
Graphics includes GeForce gaming GPUs for PCs and laptops as well as professional visualization chips for workstations. Compute & Networking covers data center GPUs/accelerators, automotive chips, and Nvidia‘s networking products (Mellanox).
Here‘s a breakdown of Nvidia‘s revenue by segment and market platform over the past three fiscal years:
| Segment/Platform | FY2022 | FY2021 | FY2020 |
|---|---|---|---|
| Graphics | $12.46B | $7.76B | $7.19B |
| Gaming | $11.76B | $7.10B | $6.81B |
| ProViz | $0.70B | $0.66B | $0.38B |
| Compute & Networking | $14.48B | $7.09B | $3.95B |
| Data Center | $10.61B | $6.70B | $2.98B |
| Auto | $0.56B | $0.35B | $0.70B |
| OEM & Other | $3.31B | $0.04B | $0.27B |
| Total | $26.91B | $16.68B | $10.92B |
Source: Nvidia financial reports
As you can see, Nvidia has delivered torrid growth over the past three years with total revenue expanding at a 57% CAGR. The two key drivers have been gaming and data center.
Gaming revenue soared during the pandemic as demand for GPUs skyrocketed with people stuck at home. Crypto mining also drove strong sales before the recent bust. In data center, Nvidia has seen tremendous adoption of its accelerators for training AI models. Hyperscale customers have rapidly added Nvidia‘s data center GPUs to power increasingly sophisticated machine learning workloads.
However, that growth has slowed considerably in recent quarters. In Q3 fiscal 2023 (ended October), Nvidia‘s revenue was down 17% yoy to $5.9 billion. Gaming revenue plunged 51% yoy while data center eked out just 1% growth.
In Q4, Nvidia guided for revenue to decline 21% yoy to $6.0 billion. Gaming is expected to decrease again sequentially while data center should be flat to slightly down.
So after years of hypergrowth, Nvidia is now grappling with some major headwinds. The evaporation of crypto mining demand, a pullback in consumer gaming spend, and a digestion phase in data center have all conspired to pressure growth.
Competitive Position
With growth slowing, investors are scrutinizing Nvidia‘s competitive position. How does it stack up against rivals like Advanced Micro Devices (AMD) and Intel (INTC) in key markets? And can it fend off emerging threats from custom AI accelerators by hyperscalers?
Gaming GPUs
Starting with gaming, Nvidia is the clear market leader in discrete graphics cards. According to Jon Peddie Research, Nvidia held 78% revenue share in Q3 2022 followed by AMD at 17%.
Nvidia‘s gaming GPU business is built on the strength of its GeForce brand and massive ecosystem of over 200 million gamers. Nvidia GPUs are simply a must-have for serious AAA gamers who demand the best performance.
AMD has made strides with its latest RDNA 2 architecture, powering competitive GPUs like the Radeon RX 6900 XT. But Nvidia still has the edge at the high-end, especially in ray tracing. And Nvidia‘s DLSS technology for AI-powered super sampling is a key differentiator.
Intel is the wild-card with the recent launch of its Arc gaming GPUs. While the initial reception has been mixed, Intel‘s vast manufacturing resources and CPU ties make it a formidable latent threat.
Data Center Accelerators
In the data center market, Nvidia is even more dominant. Its accelerators power the vast majority of AI training workloads globally, including at all the major hyperscalers.
A big reason is Nvidia‘s CUDA software platform which allows developers to easily run parallelizable code on its GPUs. With a library of over 2 million CUDA-accelerated applications, Nvidia‘s GPUs have become deeply embedded in the AI ecosystem.
Nvidia also has a leg up in AI performance. In the latest round of MLPerf benchmarks, Nvidia‘s A100 GPU outperformed AMD‘s MI100 by 2.5x on average across a range of AI training tasks. Nvidia‘s new flagship H100 GPU widens that gap further.
That said, AMD is a strong No.2 in data center GPUs with wins at major customers like Meta and Tesla. AMD is also gaining share in supercomputers, powering 94 of the top 500 systems in the latest list vs. just 25 for Nvidia.
Hyperscalers like Google and AWS are also developing custom AI chips for their data centers. But these are mostly limited to inference (not training) and Nvidia is actually partnering with many cloud customers to offer Nvidia-powered instances.
Automotive
Finally, let‘s touch on automotive. With the shift to electric and autonomous vehicles, auto is emerging as the next growth frontier for semiconductor companies.
Nvidia has staked out a leadership position with its DRIVE platform for autonomous vehicles and AI cockpit systems. Over 35 automakers and tier-1 suppliers have adopted Nvidia DRIVE and the company has a $11 billion design win pipeline.
Nvidia‘s SoCs handle every aspect of AV/ADAS from perception to planning and control. Nvidia is a generation ahead of rivals like Intel‘s Mobileye in autonomous driving functionality.
While auto is still a small part of Nvidia‘s business (~3% of revenue), it‘s growing rapidly and also carries high margins in the 60-70% range. As more cars add autonomous features, Nvidia‘s auto revenue could scale to multi-billion dollars over the next decade.
Growth Opportunities
Looking ahead, I see several major opportunities for Nvidia:
AI Acceleration
IDC estimates that 55% of data center servers will ship with an accelerator by 2026, up from less than 20% today. Nvidia is poised to capture the lion‘s share of that expanding market given its leadership in AI accelerators.
With the rapid advancements in foundational AI models and generative AI, the demand for Nvidia‘s GPUs should continue to grow exponentially. Companies across all industries are racing to harness machine learning and Nvidia‘s accelerators are the picks-and-shovels needed to mine the AI gold rush.
Software/Ecosystem Expansion
Nvidia is also increasingly becoming a software/ecosystem company. It has a growing portfolio of AI software such as:
- Nvidia AI Enterprise: Suite of AI tools and frameworks for deploying production AI. Sold as a subscription.
- Omniverse: Platform for building and operating metaverse applications, digital twins, and 3D simulations. Key enabler for industrial metaverse.
- Clara Holoscan: AI computing platform for medical devices and computational sensing. Powers AI-enabled surgical/diagnostic systems.
By expanding into software and complete AI systems, Nvidia can increase its value-add, stickiness, and margins over time. Management has guided for software/services to be a "multi-billion dollar" business in the coming years.
Automotive
As mentioned, the automotive market represents a massive incremental opportunity for Nvidia. From AI-powered cockpits to L4/L5 autonomous driving, Nvidia‘s DRIVE platform is broadly applicable.
With over $11 billion in design wins, auto is already a meaningful growth driver (~50% CAGR last 3 years). As Nvidia racks up more DRIVE design wins and content increases in auto, this segment could be doing $5 billion+ in revenue by the end of the decade.
Long-Term Model
To get a sense of Nvidia‘s growth potential, let‘s do a quick model. I believe Nvidia can grow revenue at a 20%+ CAGR for the next 5-10 years driven by:
- Continued adoption of AI accelerators in the data center
- Expansion of CUDA ecosystem and new datacenter form factors
- Content gains in automotive
- Growth of software/services
If we assume 20% revenue CAGR from FY23‘s $27 billion base, that gets us to over $80 billion in revenue by FY30. And with margin expansion from software mix shift, it‘s reasonable to expect Nvidia to achieve 30%+ Net Margins long-term.
Putting it together, Nvidia could be earning ~$25 billion in Net Income by the end of the decade, a 5x increase from FY22 levels. Even assuming some multiple compression, that should translate to meaningful share price appreciation for long-term investors.
Risks
Of course, no investment is without risks and Nvidia has several to consider:
Cyclicality
While Nvidia should benefit from secular tailwinds like AI and autonomous vehicles long-term, it is still subject to shorter-term cyclicality, especially in its end markets.
We‘re seeing this play out now with the crypto bust and softness in consumer demand impacting gaming GPU sales. Enterprise spending on AI infrastructure could also slow in a recessionary environment.
Nvidia‘s auto business is also tied to global vehicle sales which are notoriously cyclical. A downturn in auto sales/production would pressure Nvidia‘s revenue and profits in this segment.
China Exposure
Nvidia has significant exposure to China which has accounted for 30%+ of its revenue historically. The US government‘s new restrictions on semiconductor exports to China creates uncertainty and downside risk.
The new rules limit Nvidia from selling certain high-end GPUs for AI and high-performance computing into China. The company has estimated these restrictions could impact up to $500 million in revenue in the current quarter.
There‘s also risk of further escalation in tensions that prompts even tighter controls. Nvidia is applying for licenses from the Department of Commerce but navigating geopolitics adds to the complexity.
Competitive Risks
While Nvidia is the clear leader in GPUs/accelerators, it does face competitive risks. In gaming, AMD is a strong no.2 with its Navi 2X GPUs and Intel is a looming threat as it gets its GPU business up and running.
In data center, hyperscalers are developing their own AI chips which could reduce the addressable market for merchant accelerators over time. A slew of AI chip startups like Cerebras and SambaNova are also gunning for Nvidia with purpose-built accelerators.
Nvidia‘s CUDA moat and unmatched AI ecosystem are significant competitive advantages. But the company can‘t rest on its laurels and will need to continue to out-innovate to maintain its edge.
Valuation
Finally, valuation is a risk factor. Even after the large drawdown in the stock, Nvidia trades at a premium multiple. It‘s currently valued at 13x NTM Sales and ~45x NTM EPS.
That valuation embeds high expectations for continued strong growth. If Nvidia disappoints in the near-term or competitive headwinds arise, there‘s certainly room for multiple compression.
Conclusion
In summary, I believe Nvidia is a high-quality company with strong competitive advantages and massive growth opportunities ahead in AI and autonomous vehicles. Management has a great track record of innovation and Nvidia‘s ecosystem of developers makes it hard to displace.
Valuation is reasonable but not outright cheap. I could see the stock being range-bound near-term given cyclical headwinds and uncertainties around China. But for investors with a long time horizon, I believe Nvidia will deliver outstanding returns over the next 5-10 years.
My view is the positives outweigh the negatives and Nvidia is a Long-term Buy at current levels. For investors willing to ride out some volatility, I believe Nvidia is a great way to play the AI megatrend. Just size your position appropriately and be prepared to add on any major pullbacks.
As always, this is not financial advice and investors should do their own due diligence before investing. technology is a fast-moving sector and Nvidia‘s competitive position could change rapidly in the future.
