A top stock for gamers, A.I. tech enthusiasts, and savvy investors; but how does Nvidia make money and what are its prospects for the future?
Recent comments from Nvidia CEO Jensen Huang have thrust Nvidia’s (NASDAQ: NVDA) gaming ambitions into the spotlight once more: “I think this may very well be one of the best gaming seasons ever.” These words come just after the company’s gaming revenue was outpaced by its data centers for the first time ever. Nvidia, having also just released a teaser for its new 12-pin Graphics Processing Unit (GPU) designs, has left many wondering about the feasibility of the designs and if gaming is still the be all, end all.
With the much-anticipated GeForce event on September 1, these worries will be put to rest as more information about the new GPUs will be revealed. This is a market in which Nvidia thrives as it wins many high profile clients such as Sony, Toyota, and Tesla, and continues to innovate.
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Nvidia’s business model
Nvidia competes with Intel and AMD for the top spot in the GPU industry, currently sitting at no. 2 based on its 20% market share. The other product series which Nvidia produces is the Tegra system-on-chip processor. This chip is designed for smaller devices such as tablets and mobiles. The Tegra X1, for example, is used in the Nintendo Switch gaming device.
Nvidia is all about innovation, it is a company that uses its passion to revolutionise technology. This is essentially how Nvidia works, through innovation and the development of processor chips that produce higher-quality graphics for gamers and designers alike. For this reason, its chips are also sought out as a solution to high volume information processing for data centres and cloud computing.
How does it make money?
Normally, gaming is king for Nvidia, with its gaming business coming out with $1.65 billion in revenue for Q2, a 26% rise year-over-year and far surpassing the $1.41 billion estimated by analysts. However, this was outdone by Nvidia’s data center revenue which actually overtook its gaming counterpart for the first time ever at $1.75 billion — up 167% year-on-year and higher than the consensus estimate of $1.71 billion.
This milestone does not represent a decrease in gaming for Nvidia, which is still growing, but rather a pivot into another key revenue stream. Datacenter revenue first breached $1 billion in revenue back in Q1 2020 and includes sales of GPUs that power AI systems for business use.
Nvidia’s GPU sales are mainly from PC companies such as Dell, HP, and Toshiba who integrate them into their computers. Consumers who already have a PC can choose to go through certain retailers to buy a GPU chip that suits their own custom requirements.
From 2017-2019 Nvidia’s growth averaged at 30% annually. 2020 did see an overall slowdown in the semiconductor industry and thus this GPU developer saw a 6.8% decline in total revenue to just under $11 billion. This can be attributed to a lessening of consumer demand for consoles etc. However, in 2021 it is expected that total revenue should increase to around $15 billion as data centres and consumer demand open back up again.
I purposely did not mention Nvidia’s focus on AI until now as GPU processors are an essential part of its AI projects and research, thus can be considered part of that revenue stream. In fact, the creation of neural networks and other hardware that accelerate AI learning and training are directly integrated with the GPU chip.
These new, upgraded chips which can accelerate AI processes will be likely used by data centres and indeed PC manufacturers over the next few years, leading to more responsive, intelligent laptops, whilst speeding up cloud networks and data collection. Any investors in the company could see Nvidia grow as an essential company in the increasingly digitized world we live in.
Nvidia’s presence in the AI world is clearly being recognized as it recently signed an agreement with car manufacturer Mercedes-Benz. They will work together to power its entire fleet of cars from 2024. Nvidia’s GPU chips will become standard parts in the cars providing the software, and a full cloud-based data centre with machine learning infrastructure. Once the cars go on the market, they might even rival Tesla with their high tech remote updating capacities. We can expect Nvidia’s revenue to grow exponentially in this case.
If you haven’t yet invested in Nvidia, perhaps this might have persuaded you to do so. I believe this company is a top growth stock – already a number one choice for many in the PC market and gaming world, it is using its experience to carve out a dominant position in the ever-expanding AI sector.
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