Founded in 1993, California-based Nvidia Corp. (NVDA, Financial) is one of the largest visual computing companies in the world and the undisputed leader in supplying graphics processing units to the world.
The company operates under two segments: Graphics and Compute & Networking. Its products are used in the gaming, professional visualization, data center business and automotive markets, and its customer base includes original equipment manufacturers, original device manufacturers, system builders, add-in board manufacturers, retailers, distributors, cloud service providers, automotive manufacturers, tier-1 automotive suppliers and mapping companies. The company also has a partnership with Google Cloud to create the first-ever AI-on-5G Lab. With a market capitalization of over $625 billion, the company is among the top 10 most valuable companies in the S&P 500 index.
New doors are opening for Nvidia to grow
Nvidia's stock has fallen from its 2021 peak along with other tech giants, but this poor start to the year had nothing to do with the company’s financials. With several growth initiatives in place, the company seems well positioned to grow in the next decade.
On top of the favorable outlook arising from increased cloud adoption and the rollout of 5G technology, the growing popularity of the metaverse is creating new opportunities for Nvidia to grow as well. The company plans to become a key player of the metaverse, or the "Omniverse" as the company calls it. Software that is used to create three-dimensional worlds such as the ones offered by Adobe Inc. (ADBE, Financial) works well when they are run on chips made by Nvidia.
At the Consumer Electronics Show in Las Vegas last week, Nvidia shared its plans to distribute free versions of Omniverse software for individual artists who create virtual worlds. It will charge prices starting at $9,000 per year for the Omniverse enterprise version, which will be sold by partners such as Dell Technologies (DELL, Financial) and Lenovo Group Ltd (LNVGY, Financial). The future of virtual worlds is still a long way away and many features are under development, but with many tech giants, including Meta Platforms (FB, Financial) and Bentley Systems (BSY, Financial), betting on the future of the 3-D virtual world, it can be expected to be the next big tech revolution in the years to come. With the potential boost from the metaverse, analysts expect Nvidia’s sales and earnings per share to compound at annual rates of 20% and 25%, respectively, in the next five years.
As the industry’s largest chip company in terms of revenue, Nvidia is also poised to profit from an upgrade cycle for GPUs as many businesses are beginning to upgrade their devices to keep up with technological advancements. The company expects global semiconductor spending will almost double from where it is today by the end of this decade. To prepare itself to benefit from this favorable development, the company is continuing to invest in new technologies.
The collapsed deal might not be a bad thing
On Feb. 7, Nvidia called off the deal to buy Arm Holdings from SoftBank Group (TSE:9984, Financial). The agreement was terminated due to significant regulatory challenges preventing the deal as the Federal Trade Commission sued to obstruct Nvidia’s acquisition of Arm back in December, raising competition concerns. Nonetheless, Nvidia vowed to partner with and remain a user of Arm technology in the foreseeable future. Meanwhile, SoftBank, the parent company of Arm Holdings, is eyeing the possibility of taking the company public by next year. Although this deal could have added value to Nvidia shareholders in the long run, the market reacted positively to the cancelation of the deal, suggesting the consensus expectation was for the deal to deteriorate the company's finances.
More short-term pains are on the cards
The Federal Reserve is on track to hike interest rates this year, and the cycle could begin as soon as April. Interest rate decisions affect tech stocks more than any other market sector, so it would be rational to expect increased volatility in Nvidia's stock as the first rate hike inches closer. Although it is natural for tech stocks to react negatively to a rise in interest rates, the long-term outlook for the company remains promising and earnings should dictate terms over market performance more than any other external factor in the long run. Investors, however, might have to patiently wait for better days.
Nvidia’s well-built and high-performance chips will play a crucial role in the computing devices that will run the metaverse in the future. The demand for these products will likely remain at elevated levels in the next five years as companies rush to make a name for themselves in the metaverse. Despite short-term troubles resulting from macroeconomic headwinds, the long-term outlook for the company is bright.