Nvidia (NASDAQ:NVDA) The stock's impressive rise since early 2023 was driven primarily by rapid growth in the company's data center business, which benefited from a surge in demand for artificial intelligence (AI) graphics cards.
In the company's recently concluded fiscal year 2024 (ending Jan. 28), its data center business generated record revenue of $47.5 billion and accounted for 79% of sales. This was a significant increase of 217% compared to the same period last year.
The data center business posted strong revenue growth of $18.4 billion in the fiscal fourth quarter, up 409% year-over-year, significantly outpacing the segment's annual growth.
This suggests that Nvidia's data center business is still gaining momentum, which also explains why the company's outlook for the current quarter was well ahead of consensus estimates. Nvidia expects revenue to be $24 billion in the first quarter of 2025, an increase of 233% year-over-year.
Given that Nvidia relies on sales of chips deployed in data centers for AI training and inference purposes, it's easy to see how this business segment could continue to be a big driver for the company. We can conclude.
But investors shouldn't ignore the progress NVIDIA is making in its second-largest business segment, the one that was originally the company's bread and butter even before the advent of AI. This is because it has the potential to further accelerate the company's already impressive growth.
Nvidia's gaming business is set to grow significantly thanks to AI
Nvidia revolutionized personal computers (PCs) in 1999 by introducing what it called the world's first graphics processing unit (GPU). This is an additional processor that is installed on his PC's motherboard to run graphics-intensive workloads such as video games.
Nvidia's GPU technology has evolved over the years and is now used in multiple industries, from automotive to digital twins to AI. But at the same time, the company remains a major player in the discrete PC graphics card market with a share of more than 80%. The good thing is that this advantage translates into solid financial returns for his Nvidia.
The company generated $10.4 billion in revenue from its gaming division in fiscal 2024, an increase of 15% year over year. This is an impressive turnaround considering the gaming GPU market wasn't in great shape a year ago due to weak PC sales and oversupply. However, Nvidia's 56% year-over-year increase in gaming revenue for its fiscal 2024 fourth quarter indicates that this market has gained significant momentum.
One reason for this is the recovery of the PC market. Market research firm Canalys predicts that PC sales could increase by 8% in 2024, following a 12.4% decline last year. AI will play a key role in this growth. According to IDC, AI-enabled PCs that can run generative AI applications locally could gain solid momentum with shipments of 50 million units starting in 2024.
IDC predicts that annual shipments of these AI-enabled PCs could reach 167 million units by 2027. Still, AI PCs are expected to account for 60% of total PC shipments, so there is plenty of room for growth in this emerging niche market. For Nvidia, the introduction of AI PCs opens up significant growth opportunities. Also, the good thing is that the company has already started investing in this nascent market.
Nvidia said in its latest earnings call that it is now able to offer generative AI capabilities to its installed base of 100 million users using its RTX series graphics cards.
Additionally, in January, the company released new RTX 40 Super series graphics cards with generative AI capabilities starting at $599. Nvidia noted in his October 2023 presentation that 47% of his installed base of discrete GPU users are using his RTX graphics cards. On the other hand, only 20% of the installed base uses graphics cards more powerful than the RTX 3060, a chip that is more than three years old.
As such, we expect a large portion of Nvidia's user base to upgrade to new AI-enabled GPUs as generative AI adoption gains momentum. At the same time, the increasing adoption of AI-enabled PCs suggests there is a huge opportunity for Nvidia to capitalize on.
Nvidia could make a lot of money from AI PCs
According to IDC, annual shipments of AI-powered PCs could reach 167 million units in 2027. The researchers also note that these PCs will be equipped with specialized chips to run generative AI workloads. Nvidia's latest RTX 40 series GPUs are equipped with Tensor cores that enable AI workloads. These Tensor Cores deliver performance between 242 and 1,321 tera operations per second (TOPS).
This puts Nvidia's RTX 40-series GPUs in the category of advanced AI chips, IDC said. It states that AI PCs with specialized chips that provide performance of 60 TOPS or more are classified as advanced AI PCs.
Nvidia controls 80% of the AI ​​GPU market. If the company can maintain its share in 2027, he could sell a whopping 133 million AI GPUs for PCs that year. If Nvidia can maintain an average selling price of even $400 per AI GPU, which would be significantly lower than the RTX 40 Super Series' starting price of $599, it could generate as much as $53 billion in annual gaming revenue by 2027.
That's more than five times Nvidia's gaming revenue in its most recent fiscal year, and suggests the company will continue to enjoy solid growth in a market that thrust Nvidia into the spotlight a few years ago and has long been its bread and butter. suggests that it can be done. Considering the potential growth the company could realize in its data center business over the next five years, it's no surprise that the stock market remains hot on the upswing in the long term.
That's why investors would be wise to buy this semiconductor stock while it's available at an attractive forward P/E of 33x. Nasdaq-100 The index has a forward earnings multiple of 31x.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
Nvidia makes a lot of money selling artificial intelligence (AI) chips, but you might be surprised how much money it makes from this traditional market. The original article was published by The Motley Fool.