Nvidia (NVDA -9.23%) is one of the most influential semiconductor companies in the world. But the maker of advanced computer chips is rapidly expanding beyond its hardware business and into platform computing, with a range of innovative software products built using its pioneering expertise in artificial intelligence.
The company just released its financial results for the second fiscal quarter of 2023 (ended July 31), and despite surprising investors with a slowdown in its gaming segment – which was once its main revenue driver – there were plenty of positives that investors should be paying attention to.
Nvidia stock is down 51% from its all-time high, and here’s why this is a great long-term opportunity in light of its recent financial results.
The game slowed down, but the data center soared
Nvidia’s graphics chips (GPUs) became a staple among PC gamers around the world, and they led to increased gaming segment revenue for the company at the height of the pandemic as people spent more time at home. But in the last quarter, gaming revenue was the (negative) headline with a 33% year-over-year decline to $2.04 billion.
The company cited a range of reasons for the slowdown, including weakness in Europe due to geopolitical tensions and soaring inflation around the world, which hurt consumer purchasing power. In tough economic times, consumers are less likely to spend big bucks on expensive computer chips for entertainment purposes like gaming.
The segment will likely rebound eventually, especially thanks to innovations like Nvidia’s cloud-based GeForce Now platform. It allows its 20 million registered players to access more than 1,350 titles online without having to constantly download updates and patches.
But Nvidia’s data center segment took much of the slack in the quarter with a whopping 61% increase in sales to $3.81 billion. It’s now the company’s largest business unit, and arguably the most exciting in the near term, as it continues to drive innovation using artificial intelligence. Historically, data centers have been used to store information, but Nvidia’s advanced chips have turned them into powerful machine learning engines, analyzing mountains of data to deliver valuable insights to customers.
Overall, Nvidia’s gaming and data center segments accounted for 87% of the company’s total revenue in the quarter, which was $6.7 billion, or just 3 % more than the same period last year.
Nvidia’s automotive segment stands out
The remaining 13% of Nvidia’s revenue in the quarter came from its two smallest segments: professional visualization, and automotive and robotics. Professional visualization is the larger of the two with $496 million in revenue, and it was down 4% year-over-year. However, there is an exciting story unfolding in the automotive space.
This business unit is powered by Nvidia’s Drive platform, an end-to-end solution for automakers looking to integrate self-driving capabilities into their vehicles. So far, at least 35 car brands have pledged to use the technology, and the electric vehicle maker Nio is one of the latest to unveil a new model powered by Drive Orin.
Nvidia’s automotive segment grew 45% in the second quarter. That equates to just $220 million in revenue, but the company has already built an $11 billion sales pipeline through 2026, so this business is poised to become a lot bigger.
Nvidia stock is a bet on the future
Artificial intelligence is the future. An estimate from the McKinsey Global Institute suggests it will add $13 trillion to the global economy by 2030, with 70% of businesses using technology in one way or another. Likewise, autonomous vehicles are the future of the automotive industry, and this particular segment of the market could represent a $2.1 trillion annual opportunity over the same period, according to Allied Market Research.
Nvidia has already built leading positions in both of these areas, so investors would do well to overlook any short-term bumps in the road and instead focus on the bigger picture.
Additionally, Nvidia is a profitable business with non-GAAP (adjusted) net income of $11 billion over the last four quarters. It is therefore a relatively low-risk way for investors to gain exposure to these emerging industries. Smaller players in areas like artificial intelligence don’t benefit from large, established data centers and gaming units to fuel their investments in innovation, so Nvidia is building its presence from a position of large strength.
Simply put, investors recently sold Nvidia stock based on its second-quarter results, but that could be a giveaway for people who want to take a five- to ten-year time horizon.