A Deep Dive on NVIDIA's Hidden Future Goldmines

NVIDIA (NVDA) is a household name in the world of GPUs, gaming, and now AI, but in this article, I would like to explain why the tech behemoth is much more than that. See NVIDIA has some hidden goldmines that have not been fully realized in its accelerated compute platform portfolio. In this article I will outline these different hidden goldmines that haven’t reached their full potential and value for NVIDIA and its potential customers. These areas of the business have large tailwinds behind them and will continue to grow over time and I would like all my readers to be aware of them.

While the company’s gaming segment draws much of the spotlight, NVIDIA has been quietly but robustly diversifying its portfolio, venturing into markets that have massive potential for long-term growth. The obvious segment that analysts and the media are discussing about is NVIDIA’s datacenter business and its record-breaking results. This comprehensive dive into NVIDIA's business will hopefully shed light on the lesser known, yet highly promising areas that are setting the stage for creating long-term shareholder value. The recent Q2 FY24 financial results not only underline a record-breaking quarter but also highlight remarkable growth in these often-overlooked business sectors.

A Financial Quarter for the Ages

NVIDIA's Q2 FY24 was a milestone quarter, with an astounding $13.51 billion in revenue, which represents a 101% increase year-over-year. The Data Center revenue hit an all-time high at $10.32 billion, soaring by a mind-boggling 171% compared to last year. This was fueled by unprecedented demand for the Hopper and Ampere GPU architectures. The gaming segment came back in full force with $2.49 billion, up 11% from the previous quarter and up 22% from last year. The Professional Visualization segment posted revenue of $379 million, up 28% from the previous quarter, but down 24% year-over-year. One of the other emerging markets for NVIDIA is their Automotive sector, which showed a 15% uptick year-over-year to reach $253 million and has much further to run in the future.

The stellar second quarter results weren’t just a top line beat but a very profitable quarter as well. NVIDIA’s GAAP net income was $6.18 billion which was up 843% year-over-year and earnings per diluted share for Q2 was $2.48, up 854% from last year and 202% from Q1! NVIDIA repurchased over 7.5 million shares for a total of $3.28 billion, giving back value to shareholders. The gross margins grew to 70%, which was up over 26% year-over-year and is 20% higher than AMD (AMD) and 32% higher than Intel (INTC)! Now that we got the recap on NVIDIA's record-breaking quarter out of the way, let's take a closer look into the hidden goldmines from NVIDIA yet to be fully realized.
 

What is Different About NVIDIA's Datacenter Segment?

The Data Center segment has proven to be an invaluable asset to NVIDIA, especially with the growing development of large language models and generative AI. The Hopper and Ampere architectures for their GPUs and CPUs have attracted interest from enterprise customers, contributing significantly to the record-breaking figures for last quarter.

What I believe is overlooked by many analysts and investors is the overall power of the accelerated compute platform from NVIDIA and the value it provides its customers. Their customers will get great performance results from their hardware products, but they will get even better results when using it in-tandem with NVDIA’s software ecosystem. Jensen Huang started with graphics cards at NVIDIA but had the vision to create an end-to-end accelerated compute platform that would continue to defy Moore’s law. NVIDIA captured the GPU market and continues to innovate in this arena for AI use cases, but also has revolutionary CPUs, and DPUs.

See, Jensen had the foresight to examine where bottlenecks were within the hardware, software, and developer layers of computing and then take action to solve these issues. He either solved these challenges with organic growth and new product creations or acquisitions, including the most strategic of them all, purchasing high performance networking company Mellanox in 2020. This acquisition allowed for the future creation of NVIDIA’s DPU chips that Jensen Huang spoke on saying, “This is going to represent one of the three major pillars of computing going forward. The CPU is for general-purpose computing, the GPU is for accelerated computing, and the DPU, which moves data around the data center, does data processing.”

This is important to understand from an investor & technology perspective that Jensen Huang removed the bottlenecks with the way his hardware chips communicate together and speak to the software layer. He then focused on capturing the mindshare of one of the most important human technology workers, the Developer, by creating the acceleration libraries for code, called CUDA and CUDA-X. Now, millions of developers create their applications and games with these libraries and utilize the application frameworks such as NVIDIA Drive, NVIDIA Isaac Robotics, NVIDIA Holoscan, and the list goes on and on (seen in the image below).

Lastly, Jensen had divisions of teams create the NVIDIA AI Platform which can be used in the cloud or on-premises for businesses to use AI for better business efficiencies. NVIDIA also created its version of the Metaverse for Business and Collaboration, called the Omniverse which we will talk about later. Jensen then continues to release new breakthrough chips like the GH200 Grace Hopper Superchip that push the boundaries of performance and power utilization exponentially. Why is that important? Because it will force industries to continue to evolve and upgrade to new chips and software if they want to get ahead of their competition.

The Professional Visualization Business Segment

Let’s talk about one of the emerging markets for NVIDIA, their Professional Visualization segment of their business. Here, NVIDIA’s Quadro series of GPUs are gaining momentum and their applications spanning architectural visualization, digital content creation, and medical imaging. This segment's growth shows that NVIDIA is more than just a gaming company and can solve a wide array of business challenges for industries of all types. 

Earlier this August, NVIDIA announced a major release of its NVIDIA Omniverse™ platform, offering new foundation applications and services for developers and industrial enterprises to optimize and enhance their 3D pipelines with the OpenUSD framework and generative AI. NVIDIA joined Pixar, Adobe, Apple, Autodesk, and the Joint Development Foundation to form the Alliance for OpenUSD (AOUSD) to promote the standardization, development, evolution, and growth of Pixar’s Universal Scene Description technology. This alliance will help drive the adoption of USD which in turn will also drive adoption of NVIDIA’s Omniverse platform. OpenUSD is a 3D framework that enables interoperability between software tools and data types for the building of virtual worlds and digital twins. Almost any business or part of a business can benefit from creating a digital twin to simulate decision making in the real-world.

There are already several examples of customers building digital twins of their manufacturing floors or products with NVIDIA Omniverse, such as Amazon, BMW, WPP & Denza, and Mercedes. BMW was able to save over 30% of its CAPEX costs on the creation of their real-world factories because of their utilization of NVIDIA Omniverse. Amazon (AMZN) is not only using NVIDIA Omniverse to create their digital twin of their warehouses but also utilizing NVIDIA Isaac Sim to optimize their design, workflows, and train their robotic assistants.

The Omniverse platform is planned to be a big growth driver for NVIDIA in the future. Founder and CEO Jensen Huang said, “Just as HTML ignited a major computing revolution of the 2D internet, OpenUSD will spark the era of collaborative 3D and industrial digitalization. NVIDIA is putting our full force behind the advancement and adoption of OpenUSD through our development of NVIDIA Omniverse and generative AI.”

The Alternative to Tesla is Often Using NVDIA's Automotive Segment

With a 15% year-over-year growth and contracts with many of the major auto manufactures, this segment is showing NVIDIA's strategic efforts to become a pivotal player in the automotive industry, particularly in autonomous driving technologies. NVIDIA and BYD's partnership is one example of this, as they are reimagining how we think about cars. BYD's decision to extend its use of the NVIDIA DRIVE Orin platform across its Dynasty and Ocean series of vehicles signals a shift towards high-performance centralized computers in cars, rather than multiple embedded controllers. This partnership allows BYD to not only enhance safety but also enable over-the-air software updates, offering customers a continually improving driving experience, like Tesla (TSLA).

NVIDIA's DRIVE AV platform is an end-to-end solution designed to usher in a new era of mobility. Its scalability and capability to run multiple deep neural networks simultaneously make it the go-to choice for not only consumer vehicles but also robotaxis, last-mile delivery vehicles, and even trucks. NVIDIA has accumulated over $14 billion in NVIDIA Drive pipeline that will be recognized over the next six years. Their customers include Lucid, Mercedes, Cruise,Nio, Volvo, XPeng, Hyundai, Jaguar, Land Rover, and more.

In a groundbreaking move, NVIDIA recently partnered with Siemens to create an industrial metaverse. By linking the Siemens Xcelerator ecosystem to NVIDIA's Omniverse, this alliance is set to transform industrial automation, opening up vast opportunities for both companies in the auto industry.

As the automotive industry evolves with EVs, Autonomous Vehicles, Robotaxis, etc. NVIDIA is positioned to be the picks and shovels of the industry and empowers the competition against Tesla. I do believe Tesla will be the leader in the EV and autonomous vehicle industry, but I also believe that NVIDIA will have its automotive segment empowering all the other EV companies and this segment will be a much larger part of NVDIA’s revenues in the future. For now, this part of the business is not what investors are talking about but they will be in the future.

Q3 Forecast and Long-term Outlook

Looking ahead, NVIDIA is optimistic, projecting a Q3 revenue of approximately $16 billion! The company expects robust growth in GAAP and non-GAAP gross margins and operating expenses. These strong projections not only validate the company's financial acumen to their business and demand, but also forecast a very bright future ahead. This is validated by the additional $25 billion stock repurchase program NVIDIA announced on this past earnings call. Announcing a potential stock buyback at these share prices showcases a sign of strength and the company believing they are still undervalued to what they will accomplish.

When investing in NVIDIA just ask yourself, “Who will be enabling companies to do the fastest and most efficient AI training in the datacenter to transform their business outcomes? What other AI systems are car manufacturers adopting besides NVIDIA drive? What company has the most supercomputers in the world? What code libraries and application frameworks are developers using at gaming companies, healthcare organizations, manufacturing, and other industries?” My point is, there is a reason why most Fortune 500 companies are utilizing some form of NVDIA technology and there are tons of future growth opportunities for NVIDIA to maximize those customer accounts but entire industries in general.

Final Thoughts

I am not naive to think that the valuations NVIDIA currently trades at can't fluctuate lower due to macroeconomic events, China risks and exposure, or even an AI glut of hardware inventory if supply & demand are not anticipated correctly.  In fact, I almost would expect a short-term pull-back, but that just creates buying opportunities for the long-term investor. I recommend just reading about all the challenges NVIDIA is solving for companies and entire industries (see below).

The multifaceted nature of NVIDIA's business — from its record-breaking performance in Data Centers and Professional Visualization to its groundbreaking initiatives in the automotive and industrial sectors — presents a compelling long-term investment narrative. As we all sift through the phenomenal Q2 FY24 results and look towards a promising Q3, it becomes increasingly evident that NVIDIA's value proposition extends well beyond gaming and even GPUs. It's a tech titan that is shaping the future, and in doing so, setting itself up for enduring shareholder value for the long term.

Hopefully after reading this article, you can see why the automotive industry segment and professional visualization parts of the business will have a much larger contribution to overall revenues and margins in the future. I am a patient investor in innovation, growth, and companies that try to solve the most difficult and impactful problems to the world, and this is why NVIDIA is at the center of my portfolio. Now I challenge my readers to dig deeper into NVIDIA and learn more about these and the other segments of NVIDIA’s business and see if it makes sense for your portfolio.