1 big reason to buy Nvidia stock right now, and it’s not artificial intelligence (AI). composed fool

Artificial intelligence (AI) has been the biggest catalyst Nvidia (NVDA 3.45%) In 2023, the rapid adoption of this technology led to a sharp increase in the company’s revenue and income. But the chipmaker is set to take a hit from another key market as the year draws to a close.

Nvidia made its name as a maker of graphics processing units (GPUs) for gamers, but since its chips started working in data centers, its reliance on that market has waned. Still, gaming makes up a good chunk of Nvidia’s top line and is its second-biggest business. It generated $2.5 billion in revenue in the second quarter of fiscal 2024 (the three months ended July 30), which was roughly 19% of the company’s total revenue.

The good part is that this business has recently taken off thanks to improving conditions in the PC market, and could play an important role in helping Nvidia maintain its sustainable momentum in the short and long term.

Nvidia’s gaming business is on the rise again

Falling PC sales last year pushed Nvidia’s gaming revenue down 27 percent to $9.07 billion in fiscal 2023 (end of January 2023). According to market research firm IDC, shipments of personal computers in 2022 will decrease by 16% to 292 million units. Declining demand for PCs has negatively impacted sales of Nvidia’s gaming graphics cards, leaving the company with a large amount of unsold inventory.

The company’s margins took a hit and its overall business remained stagnant last year. That trend continued in the first quarter of fiscal 2024 as its gaming revenue fell 38 percent year-over-year to $2.24 billion. However, a major turnaround occurred in the following quarter, when gaming revenue rose 22% year-over-year.

This surge in Nvidia’s gaming division coincides with signs of stability in the PC market. IDC notes that PC sales in the first quarter of 2023 were down 29% year-over-year. With sales down just 8% in the third quarter, the PC market appears to be on the mend.

The research firm added that “PC inventory has also softened over the past few months and is near healthy levels in most channels.” Therefore, it would not be surprising to see further improvements in the PC market in the final quarter of the year, followed by a recovery in 2024 when the market is expected to return to growth. The shipment of IDC projects will increase by about 4 percent.

This is good news for Nvidia’s gaming business, which is already taking off. Jon Peddie Research estimates that PC gaming hardware sales could rise 11% to $41.4 billion in 2024, following a flat decline in 2023. Meanwhile, TechNavio predicts that the gaming GPU market alone will grow at a CAGR of 16% between 2027 and 2022. , added more than 30 billion dollars in revenue during this period.

Why the gaming business is built for long-term growth

According to Jon Peddie Research, Nvidia is in pole position to capture a large portion of the growing growth opportunity in the gaming GPU market, as it currently controls 80 percent of the space. More importantly, Nvidia has a huge base of installed gamers who are likely to upgrade to their new range of gaming cards.

In June, the company noted that 56% of its installed base uses non-RTX series graphics cards. The first generation of the company’s RTX cards came out five years ago, meaning these users are currently in an early upgrade window. In addition, Nvidia said that its latest generation of Ada Lovelace graphics cards have an average selling price (ASP) of more than $699, which is 3 times the ASP of the first generation RTX Turing series graphics cards.

Meanwhile, Nvidia predicts further growth in the global installed base of gamers over the next three years. All of this supports the potential for its gaming business to benefit from a combination of higher ASPs and stronger volumes. This makes this segment another growth driver for Nvidia in the long term, complementing the tremendous growth it is seeing in AI.

Analysts also expect Nvidia’s revenue to grow rapidly thanks to pricing power in AI chips.

Data by YCharts.

A similar scenario in the PC gaming market means that Nvidia could see even stronger growth thanks to the rising ASP of gaming GPUs. That’s why savvy investors looking to buy growth stocks right now should pile into Nvidia stock and take advantage of the company’s 15% drop in its stock price since the start of September.

Harsh Chauhan has no position in any of the listed stocks. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a disclosure policy.

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