Semiconductor chips are one of the most important parts of artificial intelligence (AI). Graphics processing units (GPUs) play an important role in generative AI applications, including machine learning, accelerated computing, and large language models (LLMs).
At the heart of GPU manufacturing is the “Magnificent Seven” member. Nvidia (NASDAQ: NVDA ). Demand for its flagship A100 and H100 chips is growing, and investors aren’t shy about cheering on the stock. As of this writing, Nvidia is the third most valuable company in the world by market cap — easily ahead Amazon And the alphabet.
Investors may not realize that Nvidia is more than just a hardware developer. The company has an emerging software business and is investing in several other growth drivers, including robotics and voice-activated AI assistants.
Below is a breakdown of the current state of Nvidia’s business. I will also examine why software can be a profitable growth tool for a company in the long run.
The chip business is booming.
For Nvidia’s fiscal year 2024, which ends on January 28, 2024, the company reported a 126% year-over-year increase in revenue to $60.9 billion. Much of this growth was due to increased interest in GPUs. It’s caught up in Nvidia’s data center segment, which grew 217% year over year to $47.5 billion last year.
Nvidia is considered the market standard for high-performance GPUs and has achieved high pricing power compared to the competition. This dynamic has not only fueled the company’s strong top-line growth but has also contributed significantly to its profitability. In fiscal 2024, the company increased free cash flow more than six times and increased its gross margin to 72.7 percent from 56.9 percent in fiscal 2023.
What’s most encouraging about all of this is that Nvidia’s growth is coming almost entirely from its chip business. But during the earnings call, management dropped a subtle hint about what the company’s next frontier might look like.
Something big could be on the horizon.
During a recent earnings call, Nvidia Chief Financial Officer Colette Kress said the company “has also made great progress with our software and services offering, reaching an annual revenue rate of $1 billion in Q4.” This is a big deal because it shows Nvidia’s ambitions to build beyond semiconductors.
Additionally, while Nvidia currently dominates the GPU market, competition from Amazon, MicrosoftAnd Advanced Micro Devices is heating up. While it’s hard to know for sure, I suspect that as more chips hit the market, Nvidia will slowly begin to lose its market dominance. As such, investors should anticipate some margin deterioration at some point in the coming years.
Even so, the software business may represent a silver lining amid growing competition in the chip space — that is, software carries much higher margins than hardware. Even if other players start eating into Nvidia’s market share in the GPU space, the company has identified a fast-growing, high-margin business to mitigate that risk.
Additionally, while reaching the $1 billion revenue run rate is impressive, the software business is still small compared to Nvidia’s core data center operation. However, if recent demand trends are any indication, the software platform could become a major source of growth sooner rather than later, as Nvidia offers an end-to-end AI networking solution.
How can Nvidia take advantage of the software?
I see two areas where Nvidia could deploy its software. The first is in voice-activated AI assistants. Rivals, incl apple, Microsoft, Amazon, and Alphabet, have all expressed interest in speech recognition software. That’s not surprising, considering industry estimates suggest the market for speech recognition software could reach $50 billion by 2029.
Nvidia is the latest mega-cap tech business to join the party after investing in Sound Hound AI. While SoundHound AI is still fairly young, the long-term prospects of a partnership with Nvidia could prove to be lucrative.
Another area where I think Nvidia can play a big role in AI software applications is robotics. Following the news of the SoundHound AI deal, Nvidia announced that OpenAI, Microsoft, Jeff Bezos, and Intel Figure Capital in $675 million funding round in AI — a developer of humanoid robots. According to Goldman SachsGiven the potential to disrupt the labor market in industries such as manufacturing and logistics, the addressable market for humanoid robots could reach $38 billion by 2035.
Robotics could be a particularly interesting area for Nvidia, as the company can help further develop the technology through both its chip and software businesses. I think Nvidia’s growth is just getting started. I think the company can maintain this momentum for years to come, and I’m excited to see how it disrupts the AI ​​revolution.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Adam Spatiko has positions at Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool recommends Intel and the following options: Long January 2023 $57.50 calls on Intel Long January 2025 $45 calls on Intel Long January 2026 $395 calls on Microsoft Short January 2026 $405 calls on Microsoft and short May 2024 $47 calls Intel Motley Fool has a disclosure policy.
Nvidia is already making waves outside of semiconductors. This is the company’s latest artificial intelligence (AI) milestone. Originally published by The Motley Fool.