3 Things About Nvidia That Smart Investors Know

3 Things About Nvidia That Smart Investors Know

Nvidia (NVDA -0.87%) shares have been battered over the past 12 months, with the stock down 50% year to date. The company has suffered from sharp declines in the graphics card (GPU) market this year, with global shipments down 25.1% in the third quarter of 2022, according to Jon Peddie Research. Reduced consumer demand affected the entire PC market, fueled primarily by increases in inflation.

Considering Nvidia’s 72% market share in the discrete GPU market, investors have rightly become concerned about the tech giant. However, not all hope is lost for the company. Here are three things smart investors know about Nvidia.

1. Lead the discrete GPU market

Nvidia’s rise in the tech world is largely due to its dominance in the consumer GPU market, which gives it real power in the industry to take on the rising competition.

For example, 2022 saw Nvidia’s biggest product launch since 2020 with its RTX 4000 series of graphics cards, replacing the previous generation’s RTX 3000. The launch got off to a rocky start, with consumers unhappy with price hikes across the range. The RTX 4080 started at $1,199, while its 2020 equivalent, the RTX 3080, launched at $699.

So when Advanced Micro Devices (AMD 1.03%) released its Radeon RX 7900 XTX in December at $999 and within 2% of the same power as Nvidia’s RTX 4080 16GB, it seemed to spell trouble for the company. However, Nvidia’s leading position in the market gives it some options to combat AMD’s offerings.

Despite the Nvidia RTX 4000 series’ significantly higher prices, it reportedly only costs around $300 to manufacture its RTX 4080. And with that, the company has plenty of room to counter AMD’s competitive pricing. As it stands, the only thing AMD’s new cards have going for them over the RTX 4000 series is value. Nvidia has the market share and dominance.

2. A profitable venture in game consoles

In 2017, Nvidia became the exclusive provider of graphics and processing power for one of the best-selling gaming consoles in history, Nintendo‘s Switch. As of November, Nintendo has sold more than 114 million Switch consoles, with just as many of Nvidia’s custom chips finding their way into mainstream use.

Numerous reports have revealed that Nintendo is currently developing a successor to the Switch that could launch as early as 2023. Since 2017, Nintendo has released a Switch console variant every two years, with a Lite version in 2019 and an OLED Switch in 2021.

If the past is anything to go by, consumers should be able to expect a new Switch in 2023. A redesigned successor to the console will significantly boost sales as Switch owners look to upgrade their current consoles. If this is the case, Nividia sees significant profits from its pivotal position in the development of the Nintendo Switch.

3. A booming data center business

While Nvidia is best known for its desktop offerings, it’s also home to a thriving data center business. In its third quarter of 2022, data centers made up the majority of Nvidia’s revenue. The segment earned $3.8 billion, up 30.5% year-over-year and accounting for 64.6% of the quarter’s revenue.

With the cloud computing market expanding rapidly, data centers are only growing in demand, and Nvidia is well positioned to profit significantly for the long term. According to Grand View Research, the $368.97 billion cloud computing market will grow at a compound annual growth rate of 15.7% through 2030, with data centers pivotal to the industry’s development.

In November, Nvidia entered into a multi-year partnership with Microsoft‘s Azure to build a “massive cloud AI computer.” The collaboration will combine Azure’s supercomputing infrastructure with Nvidia’s GPUs. Considering that Azure accounts for a rapidly growing 25% market in cloud computing, the team could be incredibly profitable for Nvidia’s long-term future.

Nvidia may have stumbled in 2022, but that hasn’t hindered its long-term prospects. Its price-to-earnings ratio of 65 suggests that its stock is not currently the best value. However, Nvidia is definitely a company to watch closely as its financials are likely to improve in the new year, making it a good time to invest.

Dani Cook has no position in any of the listed stocks. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft and Nvidia. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.

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