Graphics processing unit (GPU) designer Nvidia (NASDAQ: NVDA) seems to be thriving well in various domains. Research firm Needham observed that strong gaming sales, recovery in the data center business, slow but sure growth in automotive sales, a stable macro-economic environment as well as the PC market, and consistently solid gross margins are supporting the company’s efforts to maintain its dominant name in the tech world.
Speaking of the company’s profitability, non-GAAP gross margins have expanded to the 67% range, owing to a larger mix of high-margin products and the introduction of more software/services.
The research firm recently hosted the 24th Annual Needham Virtual Growth Conference, in which it interviewed Nvidia CFO, Colette Kress. Needham analyst Rajvindra Gill emerged impressed with the developments within the company. He summarized a few areas of growth that are fueling the NVDA stock’s strong prospects.
Gaming Promises Big Opportunities
Strong demand for gaming GPUs continues to fuel Nvidia’s top-line performance. “Gaming popularity is surging with 28 million users seen concurrently on Steam (the most popular game download/management application) in recent times and laptop demand with NVIDIA GPUs was particularly strong recently. We view this as a positive to future revenue growth and expect gaming to reach $15 billion in FY’23,” noted Gill.
The analyst also points out one interesting data point here. About 75% of the global installed base of GeForce GPUs has not yet upgraded to the latest generation of processors which feature the RTX (Ray Tracing), indicating that a widespread upgrade cycle awaits in the near future. Ray tracing is a feature that is being widely used in games nowadays.
Data Center Holds Promise Despite Competition
Again, Gill noted that only around 10% of Data Center servers are GPU-based, giving immense room for growth in this area with the growing proliferation of artificial intelligence and machine learning applications.
“AI models have become more common, larger, and more complex, and we believe this will continue to fuel growth,” noted Gill. The expected total addressable market for Data Center for the calendar year 2024 is $100 billion, demonstrating the opportunity that lies ahead for Nvidia.
Gill, however, is wary of the increasing competitive pressure that is threatening the company’s long-term positioning in the Data Center domain. Nonetheless, the analyst believes most industries will accelerate their transition to AI-based systems. This can be a saving grace for Nvidia’s Data Center business.
Tech Advancements in Automotive Bode Well
The automotive industry is another area in which the company deals. Nvidia has become seasoned in designing infotainment systems for cars, and is now broadening its scope in hardware and design solutions for autonomous vehicles.
The company’s DRIVE platform, which is quickly gaining traction among OEMs (original equipment manufacturers), allows vehicle manufacturers to “test and train large data sets via their DGX systems, conduct simulation on those data sets with Omniverse at the respective customers’ data centers, and offer the AI compute and sensor suite.”
This apart, OEMs are also able to design sophisticated platforms with the help of Nvidia’s Hyperion platform.
Most importantly, the company has reported a pipeline of $8 billion in Automotive, and Gill expects revenues of $575 million from this segment in FY’23.
The Omniverse is with Nvidia
The company’s metaverse project, named ‘Omniverse,’ is an interactive platform on which content creators can build and share content. As Gill puts it, it is both “a hardware and software offering, plus a services component.” Up to 40 million potential graphic designers can use the software offering to build skyscraper models and airplane prototypes, and $1,000 per user per year can be generated from this offering.
The promising prospects that Nvidia derives from this project have earned the company a position on the top metaverse stock list, highlighting the company’s growing importance in this domain.
Expert is All Praises for Nvidia
Gill reiterated a Buy rating on the stock, with a price target of $400. “We believe data center, the end-market that we view as NVDA’s biggest growth engine, is experiencing a recovery as hyperscale sales have ramped the past few quarters and visibility has improved,” noted Gill. “Moreover, we expect Gaming sales to rebound post COVID-19, especially as the number of games that have ray-tracing capabilities ramps,” he added.
The Wall Street consensus is also optimistic about Nvidia, with a Strong Buy rating based on 24 Buys and 2 Holds. The Nvidia price target is $359.17 on average, holding a 29.12% upside potential.
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