: Nvidia’s core businesses are still growing rapidly but two rare risks have emerged

After Nvidia exceeded estimates for financial results Wednesday, most investors would have expected the stock to rise. 

That would have been the case for the better part of the past two years, but this stock market is different. 

For those who suggest the price action was related to the shuttered Arm deal, I struggle to see it. The deal has floundered for months, and most put the likelihood of it getting done at low odds going back to the fall, when regulatory headwinds first made headlines.

In this case, the bottom line is not the bottom line, but rather a byproduct of the bigger picture. 

Read: Only two stocks in the benchmark semiconductor index beat Nvidia when ranked by these three measures

When markets are volatile and a particular type of trade, such as growth and tech, goes out of favor, it’s essential to know what you hold. Nvidia’s

numbers, and more importantly its strategic direction and guidance, indicate a company in the right markets, attached to the right secular trends. As a result, the company still has room for growth despite macroeconomic headwinds. 

Here are three reasons to be bullish on Nvidia and the risks that investors should be considering when looking at its prospects. 

Read: As Nvidia stock drops after record-breaking earnings, analyst wonders ‘What more can you ask for?’

Robust trends

Artificial intelligence, machine learning and gaming are Nvidia’s most prominent businesses, and none is a fad. Those secular trends are far more robust than any short-term market gyrations, and a normalization of interest rates will not stunt demand for these core business segments.

The data center total addressable market (TAM) for Nvidia is estimated at $100 billion, with little to indicate demand in this area will subside. The data center category has grown at an outsized rate for Nvidia, leading to a string of record-breaking quarters where the business has now essentially reached the same size as the gaming business. In the fourth quarter, data center revenue jumped 71% to $3.26 billion from a year earlier.

That isn’t because gaming growth has stalled either — revenue in that business advanced 37% to $3.42 billion on continued strong demand for graphic processing units (GPUs). And we also know growth could be faster, with the supply chain being a slightly limiting factor for Nvidia. However, the company has handled this exceptionally well while also seeing overall margins expand last quarter. 

The metaverse, which Nvidia refers to as the Omniverse, will be a massive opportunity. I wrote about the opportunities for the company in this business and some of the early numbers and opportunities in an earlier op-ed. The TAM for this segment is around $100 billion, and Nvidia is well-positioned to be a winner. Its developer ecosystem, growing adoption of its Omniverse portfolio and the interest in the metaverse should catalyze its professional visualization business to continue accelerating. That business’s revenue leaped 109% to $643 million. 

Underrated automotive business

The third bullish point may surprise a bit. Still, I believe Nvidia’s automotive business should turn a corner and grow more substantially and with more visibility in the next two years. Increased competition from Qualcomm

and Intel’s

Mobileye has slowed this business. Automotive revenue fell 14% to $125 million. In the previous quarter, revenue had risen 8%.

Still, recent wins with Mercedes-Benz, Nio

and, just this week, with Jaguar Land Rover will start to make a bigger impact in 2024.

Those partnerships take a long time to go from agreement to revenue, and while the soft result last quarter has drawn ire, it is far too soon to write off this segment. With vehicles increasingly relying upon chipmakers to build innovative next-generation transportation and mobility solutions, I like Nvidia’s chances for significant growth as the category expands and original equipment manufacturers (OEMs) seek differentiation. 

Key risks

The risk with Nvidia lies mainly in market conditions and fundamentals. Over the past few years, the company’s share price has rocketed toward $1 trillion, a valuation I still think is possible. However, at a price-to-earnings (P/E) ratio of almost 80, the company is being appreciated heavily for its innovation and forward growth. That’s especially when compared with other innovators such as AMD

and Apple
which have much lower valuations. 

Inflation and interest rate adjustments are giving pause to investors, leading to compressed multiples and lower short-term valuations. Furthermore, the bar for growth is going up. We have seen outstanding quarters from many of those companies mentioned above cause a quick pop, only to move sideways and down immediately. 

The final notable challenge for Nvidia is the growing ecosystem of homegrown chipmakers with Amazon’s

AWS, Microsoft and Alphabet developing AI chips. This increasing competition isn’t a tremendous concern with the overall TAM growth for AI. Still, Nvidia has benefitted from limited competition in this space, and it is hard not to see these companies’ development of chips impacting Nvidia’s business in the long run. 

As for Nvidia’s stock, investors may have to wait longer for the next runup. However, it’s hard to imagine a scenario where the company doesn’t grow into and beyond the lofty expectations held by its shareholders.

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Qualcomm, Microsoft and dozens of other companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.

This post was originally published on Market Watch

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