Opinion: Nvidia’s core business continues to grow rapidly but two rare risks have emerged


After Nvidia topped earnings estimates on Wednesday, most investors would have expected the stock to rise.

That would have been the case for most of the past two years, but this stock market is different.

For those suggesting that the price action was related to the Arm deal, I have a hard time seeing it. The deal floundered for months, and most put the likelihood of it being done with a slim chance of returning in the fall, when regulatory headwinds first grabbed headlines.

In this case, the bottom line is not the bottom line, but rather a byproduct of the bigger picture.

Read: Only two stocks in the semiconductor benchmark have beaten Nvidia when ranked by these three metrics

When markets are volatile and a particular type of trade, such as growth and technology, is out of favor, knowing what you hold is critical. NVDA from Nvidia,
the numbers, and especially its direction and strategic directions, point to a company in the right markets, committed to the right secular trends. As a result, the company still has room for growth despite macroeconomic headwinds.

Here are three reasons to be bullish on Nvidia and the risks investors should consider when considering its outlook.

Read: As Nvidia stock tumbles after record earnings, analyst asks, “What more could you ask for?”

Robust trends

Artificial intelligence, machine learning, and gaming are Nvidia’s most important businesses, and none are fads. These secular trends are far more robust than any short-term market swing, and a normalization of interest rates will not dampen demand for these core business segments.

The total addressable (TAM) data center market for Nvidia is estimated at $100 billion, and there is little evidence that demand in this area will decline. The data center category grew at an outsized rate for Nvidia, leading to a string of record-breaking quarters where the company has now essentially reached the same size as the gaming business. data centers jumped 71% to $3.26 billion from a year earlier.

It’s not because gaming growth has stalled, either – revenue from that business grew 37% to $3.42 billion thanks to continued strong demand for graphics processing units (GPUs). And we also know that growth could be faster, with the supply chain being a slightly limiting factor for Nvidia. However, the company handled this situation exceptionally well while seeing its overall margins increase in the last quarter.

The metaverse, which Nvidia calls the Omniverse, will be a huge opportunity. I have written about the opportunities for the business in this sector and some of the early numbers and opportunities in a previous editorial. The TAM for this segment is around $100 billion, and Nvidia is well positioned to be a winner. Its developer ecosystem, growing adoption of its Omniverse portfolio, and interest in the metaverse should catalyze its professional visualization business to continue accelerating. The company’s revenue jumped 109% to $643 million.

Underrated car company

The third bullish point may come as a bit of a surprise. Still, I think Nvidia’s automotive business should take a turn and grow more substantially and with more visibility over the next two years. Increased competition from Qualcomm QCOM,
and Intel’s INTC,
Mobileye has slowed down this activity. Automobile revenues fell 14% to $125 million. In the previous quarter, sales increased by 8%.

Yet recent victories with Mercedes-Benz, Nio NIO,
and, just this week, with Jaguar Land Rover starting to have a bigger impact in 2024.

These partnerships take a long time to move from deal to revenue, and while last quarter’s weak result has sparked anger, it’s far too early to write off this segment. With vehicles increasingly relying on chipmakers to create innovative next-generation transportation and mobility solutions, I like Nvidia’s chances of significant growth as the category expands and chipmakers grow. equipment (OEM) seek to differentiate themselves.

Main risks

The risk with Nvidia is mostly in market conditions and fundamentals. Over the past few years, the company’s stock price has soared to $1 trillion, a valuation that I still think is possible. However, with a price/earnings ratio (P/E) of nearly 80, the company is highly regarded for its innovation and future growth. This is especially compared to other innovators such as AMD AMD,
and AppleAAPL,
which have much lower valuations.

Inflation and interest rate adjustments are giving investors pause, leading to compressed multiples and lower short-term valuations. In addition, the bar for growth is rising. We have seen bumper quarters from many of these companies mentioned above causing a quick pop, only to then move sideways and down immediately.

The final notable challenge for Nvidia is the growing local chipmaker ecosystem with Amazon’s AMZN,
AWS, Microsoft and Alphabet are developing AI chips. This growing competition is not a major concern with the overall growth of TAM for AI. Still, Nvidia has benefited from limited competition in this space, and it’s hard not to see these companies’ chip development impacting Nvidia’s business in the long run.

When it comes to Nvidia shares, investors may have to wait longer for the next surge. However, it is difficult to imagine a scenario where the company does not grow in and beyond the high expectations of its shareholders.

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advice or consultation to Nvidia, Qualcomm, Microsoft and dozens of other companies. Neither he nor his firm holds any stake in the companies mentioned. Follow him on Twitter@danielnewmanUV.


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