NVIDIA and the $1 trillion opportunity

NVIDIA (NVDA) is viewed by many as the best semiconductor chip company in the World.

On March 22, it outlined a formidable Software product suite that will provide revenue diversification, higher margins, and an expanded reach into multiple industries.

NVDA is a stock that needs to be in your portfolio.

The New Product Line

The company’s breadth of verticals was on full display as it continues the transformation from a GPU hardware supplier to an accelerated computing hardware/software company. It’s AI computing opportunities cross essentially all industries led by data center, gaming, auto, edge, enterprise, and simulation.

NVDA introduced its next-generation GPU platform named “Hopper” H100 with production expected in 3Q22. The Hopper architecture is the next generation of accelerated computing. The graphic chip handles AI work in data centers.

Its Grace ARM server CPU remains on track to launch in the first half of 2023. The new chip targets high-performance AI, HPC, and cloud workloads. The company unveiled its “EOS” supercomputer which is the world’s fastest AI supercomputer. It announced a fourth-generation DGX system that will allow massive scalability.

The Opportunity for a $1 trillion TAM

NVIDIA laid out a total addressable market of approximately $1 trillion! This includes Auto ($300 billion), Chips and Systems ($300 billion), AI Enterprise ($150 billion), Omniverse enterprise software ($150 billion), and Gaming ($150 billion). Over 30% of this opportunity rests on the software side.

The opportunity will ultimately be monetized through hardware and software/Omniverse ecosystems.

The company remains on track to hit its Q1 (April) revenue target of $8.1 billion. NVDA stated supply chains remain tight, particularly in the gaming sector, but it expects to see material improvement in the second half of the year. Gaming card supply chain issues are primarily due to China’s covid lockdowns and the impact of the Ukraine conflict on EU gaming demand will lead to continued volatility in the sector. NVDA plans to launch new gaming products in September.

NVDA raised its auto business revenue outlook to over $11 billion for the next six years from the $8 billion announced in 2021.

Management expects to see gross margin expansion this year with growing software revenues providing a long-term margin tailwind.

A quick side note, Shares of Intel (INTC) saw some interest when CEO Jensen Huang said it was exploring the company as a foundry. Huang did say discussions would take a long time, so we do not expect to see an announcement soon.

Conclusion

NVDA remains uniquely positioned to sustain outsized growth related to machine learning/AI secular drivers and to monetize its assets in software. The company’s hardware and software compute ecosystems are expanding into a wider set of monetizable industry verticals.  Software contributions will be meaningful over time.

It is a leader in data center chips, boasts a dominant position in gaming, and possesses an impressive Auto pipeline.

Shares rallied 25% heading into its investor day. The stock is still down 12% year-to-date and 33% from the 52-week high of $346. This compares to a decline of -14% in the SOX YTD and a 20% drop from all-time highs in the PHLX Semiconductor Index (SOX).

The stock is still rich as it trades at 38x forward earnings and 22x price to sales. However, there are few companies that can provide the scale and gross margin expansion that NVDA offers.

This is a core technology holding and should be in your portfolio. Volatility around the supply chain will remain which could open more advantageous entries. If the stock slips back to the $220 area, we view that as an ideal opportunity for long-term investors.