Nvidia Is Making a Lot of Money Selling Artificial Intelligence (AI) Chips, but You May Be Surprised About How Much It Could Make From This Traditional Market

Harry Luke
Harry Luke
9 Min Read

Nvidia (NASDAQ: NVDA) stock’s stunning rally since the beginning of 2023 was primarily driven by the rapid growth of the company’s data center business, which benefited from the booming demand for its artificial intelligence (AI) graphics cards.

In the company’s recently concluded fiscal year 2024 (which ended on Jan. 28), the data center business produced a record $47.5 billion in revenue, accounting for 79% of its top line. That was a massive increase of 217% from the year-ago period.

The data center business recorded a much stronger year-over-year increase of 409% in revenue to $18.4 billion in fiscal Q4, significantly outpacing the segment’s annual growth.

This suggests Nvidia’s data center business is still gaining momentum, which also explains why the company’s outlook for the current quarter was well ahead of consensus estimates. Nvidia expects revenue of $24 billion in the first quarter of fiscal 2025, which would be a 233% increase from the year-ago period.

Given that Nvidia relies on sales of chips that are being deployed in data centers for AI training and inference purposes, it can be easily concluded that this business segment can continue to be a major catalyst for the company.

However, investors shouldn’t ignore the progress Nvidia is making in its second-largest business segment — which was originally the company’s bread and butter before AI arrived — as it has the potential to supercharge the company’s already impressive growth.

Nvidia’s gaming business is set to jump significantly thanks to AI

Nvidia brought major innovation to personal computers (PCs) in 1999 when it introduced what it calls the world’s first graphics processing unit (GPU), an additional processor tacked on to a PC’s motherboard for running graphics-intensive workloads such as video games.

Nvidia’s GPU technology evolved over the years, and it is now being used in multiple industries ranging from automotive to digital twins to AI. But at the same time, the company continues to be a major player in the market for discrete PC graphics cards with a share of more than 80%. The good part is that this dominance is leading to robust financial gains for Nvidia.

The company generated $10.4 billion in revenue in fiscal 2024 from the gaming segment, an increase of 15% from the prior-year period. That’s a nice recovery considering that the gaming GPU market was not in great shape a year ago on account of poor PC sales and oversupply. However, Nvidia’s 56% year-over-year increase in gaming revenue in the fourth quarter of fiscal 2024 suggests that this market gained tremendous momentum.

One of the reasons why that’s happening is because of the recovery in the PC market. Market research firm Canalys estimates that PC sales could increase by 8% in 2024 following last year’s drop of 12.4%. AI is going to play a key role in this growth. According to IDC, AI-enabled PCs capable of running generative AI applications locally could gain solid traction from 2024 with shipments of 50 million units.

IDC predicts that annual shipments of such AI-enabled PCs could climb to an impressive 167 million units in 2027. Even then, this emerging niche will have a lot of room for growth as AI PCs are expected to account for 60% of overall PC shipments in 2027. For Nvidia, the adoption of AI PCs will unlock a massive growth opportunity, and the good part is that the company has already started capitalizing on this nascent market.

In its latest earnings release, Nvidia said that it enabled generative AI capabilities for an installed base of 100 million users who are using the RTX series of graphics cards.

Moreover, the company released new RTX 40 Super series graphics cards starting at $599 in January, which come equipped with generative AI capabilities. In a presentation in October 2023, Nvidia pointed out that 47% of its installed base of discrete GPU users were using RTX graphics cards. Meanwhile, only 20% of the installed base is using a graphics card more powerful than an RTX 3060, a chip that’s now more than three years old.

So, a big chunk of Nvidia’s user base can be expected to upgrade to its new, AI-capable GPUs as generative AI adoption gains steam. At the same time, the increase in the adoption of AI-enabled PCs suggests that there is a huge addressable opportunity for Nvidia to tap into.

Nvidia could make a lot of money in AI PCs

Annual shipments of AI-powered PCs could hit 167 million units in 2027, as per IDC. The researcher also points out that these PCs will be equipped with dedicated chips to run generative AI workloads. Nvidia’s latest RTX 40 series GPUs come  with Tensor Cores to enable AI workloads. These Tensor Cores offer between 242 and 1,321 tera operations per second (TOPS) of performance.

This puts Nvidia’s RTX 40 series GPUs in the category of advanced AI chips, IDC said. It said   AI PCs equipped with a dedicated chip that offers more than 60 TOPS of performance are categorized as advanced AI PCs.

Nvidia controls 80% of the AI GPU market. If the company can maintain that share in 2027, it could sell a whopping 133 million AI GPUs for PCs that year. If Nvidia can maintain an average selling price of even $400 per AI GPU, which is significantly lower than the $599 starting price for the RTX 40 Super Series, it can generate a whopping $53 billion in annual gaming revenue in 2027.

That would be more than 5 times Nvidia’s gaming revenue in the latest fiscal year, suggesting that the company could still enjoy solid growth in a market that propelled it into the limelight years ago and was its bread and butter for a long time. Throw in the potential growth the company could witness in the data center business over the next five years, and it won’t be surprising to see it sustain its red-hot stock market rally in the long run.

That’s why investors would do well to buy this semiconductor stock while it is available at an attractive 33 times forward earnings, which is almost in line with the Nasdaq-100 index’s forward earnings multiple of 31.

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

Nvidia Is Making a Lot of Money Selling Artificial Intelligence (AI) Chips, but You May Be Surprised About How Much It Could Make From This Traditional Market was originally published by The Motley Fool

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Harry Luke is a Professor in University of Galway. Harry's journey has been marked by a relentless pursuit of knowledge, creativity, and a commitment to making a positive impact on the world around him.