Nvidia doesn’t just play games anymore

Semiconductor giant Nvidia (NVDA 1.06% ) saw rapid growth in its business and the stock soared. Shares have more than doubled in 2021 and have more than tripled in the past two years.

But more recently, investors have been taking profits, and that accelerated after the company reported earnings this week. But a closer look at the data and history shows that Nvidia is now much more than a games company, and growing more profitable than some investors would have thought.

Image source: Nvidia.

Growth and diversification

Nvidia increased its total revenue by 61% in its 2022 fiscal year ended January 30, 2022, compared to the prior year period. It sees this growth continuing through fiscal 2023, and not just in its gaming segment. While gaming was what Nvidia chips were best known for, it has shifted to other segments that already contribute to it. Data centers are poised to overtake gaming as the top contributor to total revenue.

line chart of Nvidia's quarterly revenue by segment.

Data source: Nvidia. Table by author.

And the company is working with automakers who will use its driver assistance and self-driving vehicle computing platforms. More recently, he announced a partnership with Tata Motors‘Jaguar Land Rover Automobile. Nvidia CEO Jensen Huang said on the company’s earnings conference call that “from 2025, all new Jaguar and Land Rover vehicles will feature next-generation automated driving systems, as well as of AI-enabled software and services built on the Nvidia DRIVE platform.

Investors worried

Even with the promising trading update, Nvidia shares fell after its earnings report. One aspect of this decision has been the huge increase in shares already achieved over the past two years. Investors may also have been spooked when the company predicted that gross margin would remain flat in the current quarter. But as the chart below shows, the company has already shown that it can grow revenue faster than expenses, and therefore increase profitability.

Data source: S&P Global Market Intelligence. Table by author. Dollars in millions.

Exciting times ahead

A year-over-year decline in auto revenue may also have worried investors. But in addition to the Jaguar and Land Rover deal, and a previously announced deal with DaimlerMercedes-Benz and Nvidia’s DRIVE computing platform to be used by Chinese EV makers Nio and XPeng for their upcoming vehicle launches.

CEO Huang also believes the company’s visualization segment will be a big part of its future. During the conference call, he explained that the company is targeting “creators contributing content to a virtual world and connecting it to bots that contribute content to a virtual world.” Huang pointed out that the number of robots used would be in the hundreds of millions.

While some investors have decided to take profits after this profit period, there is still plenty to be excited about for Nvidia’s future. The stock’s tumble, coupled with strong earnings, pushed the price-to-earnings (P/E) ratio to its lowest level in two years.

NVDA Chart

NVDA data by YCharts

Although a P/E of 60 is still expensive, if the company continues to grow at the current rate, or faster, the valuation won’t look too high for long.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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