Nvidia (NVDA -9.23%) is one of the most impressive semiconductor companies in the world. However, the maker of advanced computer chips is rapidly expanding beyond its hardware and platform computing businesses, with a range of innovative software products built using its pioneering artificial intelligence expertise.
The company just released its financial results for the fiscal second quarter of 2023 (ended July 31), and despite surprising investors with a slowdown in its gaming business — once its biggest revenue driver — there were many 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) have become a staple among PC gamers worldwide and have driven gaming revenue for the company through the worst of the pandemic as people spend more time at home. But in the most recent quarter, gaming revenue was the (negative) headline, down 33% year over year to $2.04 billion.
The company cited a number of reasons for the slowdown, including softness in Europe due to geopolitical tensions and soaring inflation worldwide, which has hurt consumer spending. In tough economic times, consumers are less likely to spend big on expensive computer chips for recreational purposes like gaming.
The segment will likely bounce back eventually, especially thanks to innovations like Nvidia’s cloud-based GeForce Now platform. It allows its 20 million registered players to access over 1,350 titles online without having to constantly download updates and patches.
However, Nvidia’s data center division picked up much of the slack in the quarter with a massive 61% increase in sales to $3.81 billion. This is 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 divisions made up 87% of the company’s total revenue during the quarter, which came in at $6.7 billion, or just 3% higher than the same period last year.
Nvidia’s automotive sector stands out
The remaining 13% of Nvidia’s revenue in the quarter came from its two smallest divisions: professional visualization and automotive and robotics. Professional visualization is the larger of the two with $496 million in revenue and shrank 4% year-over-year. However, there is a fascinating 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 autonomous self-driving capabilities into their vehicles. At least 35 car brands have signed on to use the technology so far, as well as an electric vehicle manufacturer Neo is one of the latest to introduce a new model powered by Drive Orin.
Nvidia’s automotive division grew 45% in the second quarter. That only equated to $220 million in revenue, but the company has already built an $11 billion sales pipeline by 2026, so this business is set to get very larger.
Nvidia stock is a bet on the future
Artificial intelligence is the future. An estimate by the McKinsey Global Institute suggests it will add $13 trillion to the global economy by 2030, with 70% of companies using the technology in one way or another. Likewise, autonomous vehicles are the future of the automotive industry, and this particular segment of the market could be a $2.1 trillion annual opportunity over the same time frame, according to Allied Market Research.
Nvidia has established leadership positions in both of these areas already, so investors may do well to ignore the near-term bumps in the road and instead focus on the bigger picture.
Additionally, Nvidia is a profitable company with $11 billion in non-GAAP (adjusted) net income over the past four quarters, so it’s a relatively low-risk way for investors to gain exposure to these emerging industries. Smaller players in fields like artificial intelligence don’t have the benefit of large, established data centers and gaming units to fuel their innovation investments, so Nvidia is building its presence from a position of great strength.
Simply put, investors recently sold off Nvidia stock based on its second-quarter results, but that may be a boon for people willing to take a five- to 10-year time horizon.