To The Moon

Nvidia

$NVIDIA Corp(NVDA)$ 

Semiconductor company Nvidia stumbled last year as high inflation reduced demand for its gaming and data center chips. Revenue remained flat at $27 billion and free cash flow fell 53% to $3.8 billion. Unfortunately, management expects current quarter revenue to decline 22% as economic headwinds continue to suppress demand, though guidance implies operating expenses will also fall sharply.

However, Nvidia should find it easy to reaccelerate growth when economic conditions improve. Its graphics processing units (GPUs) are the gold standard for rendering realistic visual effects in video games and films, and for accelerating complex data center workloads like scientific computing and artificial intelligence (AI). In fact, Nvidia GPUs hold more than 90% market share in workstation graphics and supercomputer accelerators.

The company has recently branched into cloud software and services. Omniverse Cloud is a 3D design platform for metaverse applications. DGX Cloud provides on-demand access to Nvidia AI infrastructure, and it includes frameworks that accelerate AI application development in areas like retail, logistics, and healthcare. Nvidia also provides generative AI services for text, images, and video. For instance, investment company Morningstar uses the Nvidia NeMo model to scan and summarize financial documents.

Those cloud services build on the brand authority Nvidia has cultivated as a chipmaker, and they create new revenue streams that offer more regular cash flow and higher margins than the sale of cyclical hardware products. Management values its addressable market at $1 trillion, and Nvidia should benefit greatly as technologies like the metaverse and AI continue to evolve.

Currently, shares trade at 24.4 times sales, above the three-year average of 20.7 times sales. That valuation is far from cheap, but Nvidia is the heart of the burgeoning AI industry, so investors should still consider buying a small position in this growth stock today.