NVIDIA Corporation (NASDAQ: NVDA) is no stranger to comebacks. In the fourth quarter of 2018, the artificial intelligence (AI) chipmaker’s shares fell 52% amid fears of rising interest rates, a global economic slowdown and cryptocurrency woes.
In the three years that followed (from 2019 to 2021), Nvidia rose by 76%, 122% and 125% respectively.
In 2022, the stock is down nearly 50% year-to-date as the market struggles with an eerily similar list of macroeconomic challenges.
However, digging yourself out of a hole this time may prove to be extra difficult. Supply chain disruptions and privacy concerns in China have reinforced this year’s bearish Nvidia sentiment.
On the flip side, the company is not what it was four years ago. Access to an expanding set of end markets and growth opportunities stands to overcome the latest setback. A turnaround in 2023 and beyond will be driven by these forces.
#1 – A return to game growth
Much of Nvidia’s downward trend has been about the gaming segment. Gaming revenue fell 51% year-over-year in the third quarter of fiscal 2023. With demand for PC video games normalizing from pandemic levels, channel partners have shifted their focus to destocking existing graphics cards instead of restocking. Economic uncertainty has only exacerbated the problem.
Fortunately, this is likely to be a temporary headwind, giving way to a potent gaming market that includes PCs, consoles and mobile. According to Statista, the global video game market is projected to grow at a CAGR of 7.7% from 2022 to 2027.
Management’s response to the inventory issue deserves praise. It effectively adjusts its own inventory levels to keep costs down in anticipation of a better environment ahead. The approach sidesteps a costly restructuring process that should put the company on firmer footing as demand from distributors such as Dell, HP and Lenovo picks up again.
Nvidia expects game channel inventories “to be on track” to normalize over the next few months. By the time fiscal year 2024 starts in February 2023, the glut of game stocks is expected to begin to decline.
Around the same time, Nvidia will have new GPU-powered acceleration products to wow gamers with, including the recently released Ada Lovelace RTX graphics cards. Meanwhile, highly anticipated video game titles such as ‘Call of Duty: Modern Warfare 2’ and ‘Top Gun: Maverick’ could create surprise demand for Nvidia’s latest gaming cards.
#2 – Data center demand
Since the acquisition of data center connectivity pioneer Mellanox in 2020, Nvidia’s “Compute & Networking” business has developed into a major strength. Data center revenue hit a record in 3Q23 with top-line growth of 31% helping to offset weaknesses in gaming – even with US government restrictions on Chinese access to US technology.
Despite the economic downturn and persistent supply chain obstacles, public cloud computing and Internet service providers (ISPs) continue to turn to Nvidia’s AI technology. The number and scale of these distributions rose again in the recently completed fiscal quarter.
Even more encouragingly, management noted that the scope of their offerings “needs to be expanded to address the diverse end-market use cases.” The energy sector is an area that is expected to increasingly adopt AI technology over the next few years.
Another thing to keep in mind is that data center growth has been strong despite weak demand from the central China market. As the Covid restrictions are lifted, data center (and gaming) revenue should strengthen considerably.
Global shifts to cloud computing environments and digital commerce are overwhelming the current macro weakness and will continue to do so as the decade progresses. In recognition of this tailwind, Nvidia is introducing new platforms that will drive the AI economy – and represent the next wave of enterprise growth.
Starting early next year, the new H100 data center GPUs will be available on Amazon’s AWS, Microsoft’s Azure, Google Cloud and Oracle Cloud. Additional technologies such as Hooper AI computing, Bluefield computing units (DPUs), quantum networks and Omniverse are all in the early stages of multi-year growth.
Nvidia’s position as a leading technology innovator for the age of deep learning and AI alone makes it worth the investment here.
#3 – Automotive has a long way (of growth) ahead
Another long-term growth lever that remains in place is Nvidia’s small but fast-growing automotive business. This segment also delivered record revenues in the 3rd quarter, growing 86% year-on-year.
At the forefront is the company’s Orin autonomous driving platform. Vehicle manufacturers have been quick to embrace the company’s AI-based DRIVE solutions based on Orin technology. The built-in supercomputers have the ability to process data from cameras, radar and lidar sensors and are therefore becoming a must-have safety feature for the automotive industry.
Nvidia has a winning automotive design pipeline valued at more than $11 billion that has yet to be reflected in its financial results and is fully appreciated by the market. That’s one more reason for investors to stick around for another Nvidia comeback.
A reset of the gaming market, explosive demand for data centers and emerging AI technologies are reasons to believe that Nvidia will increase its power in the long term. The $300 we saw a year ago is coming back.
NVIDIA is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.