Nvidia's (NVDA -3.00%) artificial intelligence (AI)-fueled growth made the chipmaker one of the hottest performers on the stock market in 2023, and the company's results for the second quarter of fiscal 2024 (for the three months ended July 30, 2023) offered confirmation of the market's confidence.
The company's quarterly revenue doubled year over year to $13.5 billion. Its adjusted earnings shot up 429% to $2.70 per share. The company's data center business was central to this terrific growth as it produced a record $10.3 billion in revenue during the quarter, up 171% from the year-ago period.
Such terrific growth was driven by the massive demand for the company's data center graphics processing units (GPUs) that are being deployed to power AI servers. The good part is that Nvidia's AI-driven growth is here to stay. This explains why Nvidia's revenue guidance of $16 billion for the current quarter points toward even stronger year-over-year growth of 171% from just $5.9 billion in the year-ago quarter.
AI, however, is not the only catalyst playing an important role in powering Nvidia's growth. The company's gaming business has also regained its mojo. Let's see why that could be a big deal for Nvidia investors.
Nvidia's gaming business is growing once again
Nvidia got 76% of its revenue from selling data center chips last quarter. Gaming was its second-largest source of revenue, producing $2.5 billion in sales and accounting for 18% of the top line. Nvidia's gaming revenue increased 22% year over year, driven by solid demand for its gaming graphics cards that are used in personal computers (PCs).
It is worth noting that Nvidia's gaming business took a beating in recent quarters on account of a steep decline in PC shipments. The company was saddled with high inventory levels of PC GPUs earlier this year when computer sales crashed, but it looks like the worst may be behind for the industry. According to Gartner, PC shipments fell at a relatively slower pace of 16% year over year in the second quarter of 2023 as compared to the 30% decline seen in the first quarter.
Gartner estimates the PC market hit bottom last quarter and demand should start picking up from 2024. The performance of Nvidia's gaming segment last quarter suggests the company is outperforming the market already and better days lie ahead once PC shipments start improving. That's not surprising as Nvidia controls 84% of the market for gaming graphics cards, according to Jon Peddie Research.
Additionally, Nvidia management pointed out on the latest earnings conference call that there is a large installed base of its GPU users that are likely to upgrade to its new offerings thanks to the end-market recovery. According to CFO Colette Kress: "We believe global end demand has returned to growth after last year's slowdown. We have a large upgrade opportunity ahead of us; just 47% of our installed base have upgraded to RTX and [only] about 20% have a GPU with an RTX 3060 or higher performance."
Nvidia is looking to capitalize on this potential upgrade opportunity with the help of new additions to its RTX 40 series graphics cards, which are capable of delivering strong performance gains at aggressive prices as compared to older cards. As a result, Nvidia should be able to sustain healthy growth levels in the gaming business.
The gaming business is built for long-term growth
The market for gaming graphics cards is expected to clock an impressive annual growth rate of 33% over the next decade, according to market research firm Infinity Business Insights. That won't be surprising considering the anticipated increase in the number of gamers, as well as the deployment of technologies such as AI and ray tracing in video games that will give users a reason to upgrade.
The number of video gamers is expected to increase by 400 million between 2023 and 2027. The good part is that gamers seem to be spending more money on Nvidia's new cards. For instance, the cumulative sell-through of Nvidia's latest generation of graphics cards -- based on the Ada Lovelace architecture -- priced at $699 or more was 3 times higher than the two-generation-old Turing cards in the first 20 weeks after launch.
All this indicates that Nvidia could enjoy a solid mix of volume and price growth in the gaming market in the future. Nvidia sees an addressable revenue opportunity worth $100 billion in the gaming market. The company generated $8.1 billion in revenue from this segment in the past four quarters, which means that there is still a massive amount of untapped opportunity in this space.
As such, along with AI, video gaming could turn out to be another big driver for Nvidia's growth in the long run, giving investors yet another solid reason to put their money in this growth stock.
