Too many comeback catalysts to ignore

Too many comeback catalysts to ignore

NVIDIA Corporation (NASDAQ: NVDA) is no stranger to returns. In the fourth quarter of 2018, shares of the artificial intelligence (AI) chipmaker fell 52% amid fears of rising interest rates, a global economic slowdown and cryptocurrency issues.



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Sound familiar?

Over the next three years (from 2019 to 2021), Nvidia jumped 76%, 122%, and 125% respectively.

In 2022, the stock is down nearly 50% year-to-date as the market grapples with an eerily similar list of macro challenges.

Burrowing yourself out of a hole this time, however, can prove very difficult. Supply chain disruptions and privacy concerns in China have added to Nvidia’s bearish sentiment this year.

On the other hand, the company is not what it was four years ago. Access to a growing set of end markets and growth opportunities should overcome the latest setback. A turnaround in 2023 and beyond will be driven by these forces.

#1 – A return to growth in the game

Much of Nvidia’s downward trend is in 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 focused on l disposal of existing graphics card inventory rather than restocking. Economic uncertainty has only exacerbated the problem.

Fortunately, it will likely be a transient headwind that will pave the way for a strong gaming market that includes PC, console, and mobile. According to Statista, the global video game market is expected to grow by 7.7% per year from 2022 to 2027.

Management’s response to the inventory issue is commendable. It effectively adjusts its own inventory levels to reduce expenses in anticipation of a better environment ahead. The approach avoids a costly restructuring process that should put the company on a stronger footing when demand from distributors like Dell, HP and Lenovo rebounds.

Nvidia predicts that gaming channel inventories “are on track” to normalize in the coming months. By the time fiscal 2024 kicks off in February 2023, the gaming inventory glut should start to dwindle.

Around the same time, Nvidia will be rolling out new GPU-based acceleration products to wow gamers with, including the recently released Ada Lovelace RTX graphics cards. Meanwhile, hotly anticipated video game titles like “Call of Duty: Modern Warfare 2” and “Top Gun: Maverick” could drive surprise holiday demand for Nvidia’s latest gaming cards.

#2 – Data Center Request

Since acquiring data center connectivity pioneer Mellanox in 2020, Nvidia’s “Compute & Networking” business has become a major force. Data center revenues hit a record high in 3Q23 with 31% revenue growth helping to offset weakness in gaming, even with US government restrictions on Chinese access to US technology.

Despite the economic downturn and ongoing supply chain hurdles, public cloud computing and Internet Service Providers (ISPs) continue to turn to Nvidia’s AI technology. The number and scale of these deployments increased again during the last fiscal quarter.

Even more encouragingly, management noted that the scope of its offerings “will need to be expanded to reflect different end-market use cases.” The energy sector is an area that is expected to increasingly use 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 key China market. As Covid restrictions are lifted, data center (and gaming) revenues are expected to strengthen significantly.

Global shifts towards cloud computing environments and digital commerce are overriding 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 company’s next wave of growth.

Starting early next year, the new H100 data center GPUs will be available on AWS from Amazon, Azure from Microsoft, Google Cloud and Oracle Cloud. Additional technologies such as Hooper AI computing, Bluefield data processing units (DPUs), quantum networks and Omniverse are all in the early stages of multi-year growth.

Nvidia’s position as a leading technology innovator in the age of deep learning and AI alone is worth the investment here.

#3 – The automobile has a long way (of growth) ahead of it

Another long-term growth driver that’s still in place is Nvidia’s small but fast-growing automotive business. This segment also produced record third-quarter revenues and grew 86% year-over-year.

The company’s Orin self-driving platform is leading the way. Automakers have quickly adopted the company’s AI-powered DRIVE solutions powered by Orin technology. On-board supercomputers have the ability to process data from cameras, radars and lidar sensors and are therefore becoming an essential security element for the automotive industry.

Nvidia has an automotive design pipeline valued at over $11 billion that has yet to be reflected in its financial results and is fully appreciated by the market. It’s all the more reason for investors to stick around for another comeback from Nvidia.

A reset in the gaming market, explosive demand from data centers, and emerging artificial intelligence technologies are reasons to believe that Nvidia will increase its power in the long term. The $300 we saw a year ago will be back.

NVIDIA is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and led by entrepreneurs.

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