Nvidia – A Trillion Dollar Opportunity?

Jensen Huang, CEO of Nvidia, made a bold statement during the Q3 2023 Earnings Call on 16 Nov 2022: the company’s addressable market has now grown to $1 trillion.

The 2022 Annual Revenue stood at $26 billion so does the claim above seem realistic? The answer is a surprising yes but over a 10-year time horizon.

Nvidia is widely misunderstood to be a company that helps people play Video Games. Over the past years, its forays into exciting frontiers of technology open up new markets – Artificial Intelligence, Cloud Computing, Robotics, Self-Driving, the Metaverse etc. And Nvidia is a key player in most of these segments or an early mover.

Current Revenue Break-Up

The sale of Graphics Processing Units (GPUs) is synonymous with Nvidia. In fact, Nvidia arguably helped create this line of business. However, in the current FY, GPU Sales are less than 50% of the Revenues.

SEGMENT	Revenue 2022
Gaming	12,462
Data Center	10,613
Professional Visualization	2,111
Automotive	566
OEM & Others	1,162
Total Revenue	26,914

FY22 Revenue – Nvidia

Let’s look at each Revenue Segment and match that with Nvidia’s projections and do a reality check with independent market estimates.

1. Gaming

Gaming business is primarily about selling Discrete Graphic Processing Units (GPUs) GPUs to gamers. Discrete GPUs are purchased to boost the capabilities of your gaming PC/laptop for an improved gaming experience.

Over a 6-year period, Nvidia’s revenues from this segment has gone up by 4.5x at a CAGR of 28%.

This number is distorted by the tremendous one-time demand due to Covid as well as Crypto mining. With the precipitous fall of Crypto and Ethereum’s Merge, the need for GPUs for mining will be insignificant going forward. While Nvidia reports Crypto GPU sales in ‘OEM & Others’ segment, its difficult to differentiate the end use of a GPU and we believe some of the sales also reflect in the ‘Gaming’ segment.

Similarly, the Stimulus cheques have stopped and a lot of GPU buying has already been frontloaded.

Excluding 2022, a 5-yr CAGR of Nvidia’s gaming revenues comes to 18%. This is a lumpy 18% with some years even seeing a decline as excess inventory is slowly worked out.

Independent estimates vary about the Gaming Market growth.

According to a report by Mordor Intelligence, “The gaming GPU market is expected to grow at 14.1% CAGR during the forecast period of 2021-2026”
Allied Market Research estimates the Global GPU market size to be $200 billion by 2027 at a CAGR of 33.6% (from $19.75 billion in 2019).

While different reports cover different time frames and also products, what is clear is that discrete GPUs should continue to see strong sales in the foreseeable future.

These numbers also compare favorably to the $100 billion Nvidia projected as its Total Addressable Market (TAM).

Cloud Gaming takes off

In an interesting move, Nvidia has launched GeForce NOW cloud gaming service. This could be seen as an early move to tap into a promising market with 5G and Edge computing picking up steam in 2023. Or it could be a way to disrupt oneself.

According to Nvidia:

“With the GeForce NOW cloud gaming service, anyone with a computer or smartphone can rent NVIDIA’s most powerful GPUs and play AAA games like Fortnite and Marvel’s Avengers.”

Nvidia CFO Collete Kress reported during Aug 2022 earnings call. “GeForce Now registered members now exceed 20 million,”. Remember, this was launched in Feb 2020 with just 1 million users. Estimates of the total market are around 31.7 million meaning Nvidia has around 63% market share.

GeForce NOW could be generating as much as $2.28 billion dollars of Revenue for Nvidia currently. This assumes 20 million users and an average membership of USD9.5 per month.

Estimates of the market size vary:

Newzoo estimates cloud gaming revenue could jump to $6.5 billion in 2024 and the total users could triple by 2025
Till 2022, most estimates by Research firms assume a CAGR of 45-50%, culminating in approximately $21 Billion by 2030

The exit of Google Stadia underscores the robustness of GeForce NOW’s offering.

Conclusion: Taking into account Nvidia’s 10 yr growth in selling Gaming GPUs and an exciting market of around $10-20 billion opening up in Cloud Gaming, a $100 billion TAM seems fair.

2. Data Center

Traditionally Nvidia has been subject to the whims of the GPU business cycles with years of plenty followed by period where the company works off the old inventory in preparation for the launch of an even more powerful (but highly priced) GPU.

The emergence of Data Centers as a Revenue source that almost matches Gaming sales is a welcome development. In 2016, Nvidia earned just $750 million from this segment. This has grown at around 55% compounded 6 years to reach $10.6 billion in 2022.

As of 2022, the global Data Center accelerator market size is estimated to be $21 billion. Nvidia dominates this market with AMD making rapid strides in the last few years.

Most estimates expect the market size to keep growing anywhere from 30-60% CAGR over the next 5-10 years. These estimates should be read with the necessary caution.

That said, going into 2023, Nvidia has several revenues streams opening up for it:

Nvidia’s Grace Data Center CPUs – The first servers powered by Nvidia’s Grace data center CPUs are set to hit the market in the first half of 2023. This brings it in direct challenge with Intel’s XEON, the reigning force in this segment. It also opens up an addressable market of $42 billion with each data center CPU costing $10,000. Shipments begin in early 2023.

AI & ML – NVIDIA’s full-stack data center offering is the market leader for AI and ML.
Including GPUs and networking, NVIDIA powers over 70%, and 8 of the top 10, supercomputers on the global TOP500 list.’
Microsoft deal: Nvidia says Microsoft is the first public cloud business to adopt its full, advanced artificial intelligence (AI) stack built from Nvidia hardware and software.
Supercomputers – According to Jensen Huang, ““Nvidia is the only company in the World to produce and ship semi-custom Supercomputers in high volume;”. They plan to ship one to every major Cloud Service Provider in a quarter. The DGX H100 ‘Hopper’ systems will start getting delivered in Q3 2023.

Conclusion: Nvidia estimated a $300 billion TAM in ‘Chips and Systems’. Given the growth in GPUs, CPUs, DPUs, NICs, switches related to Data Centers and AI computing, projected Nvidia Revenues from Data Center could be around $120 billion in 10 years, taking into account its dominance in GPUs and prospects of entry into Data Center CPU markets as well.

10 years is a long time in Technology, especially with start ups entering the Data Center computation field and game-changing technologies such as Quantum computing on the horizon.

That said, Nvidia’s current strengths & computational prowess make this segment the key growth driver for Nvidia going forward.

3. Professional Visualization / Omniverse

This segment accounts for just 7.8% of Nvidia’s Revenues but has been growing at an interesting pace of 36% CAGR over the past 6 years.

Traditionally, this segment offered solutions to optimize the offerings of design & digital content creation companies.

Around 2019, this segment took a leap into the future by creating NVIDIA Omniverse. This is a metaverse-type simulation platform. While Meta (Facebook) is struggling here, the Omniverse is already available for companies and users to simulate and test their products. Nvidia’s Omniverse isn’t a social media platform though – you can think of it as a Metaverse for Objects imitating the laws of physics.

This fast moving segment actually has the capability to transform Nvidia from a company selling Hardware products to a subscription-based recurring revenue model. The predictability of the income flow far removed from the dizzying heights and falls of gaming GPUs has the company insiders excited.

In 2022, Nvidia has started offering licenses for using Omniverse. According to the Nvidia 2022 Annual Report, “. Omniverse has been downloaded 150,000 times by individual creators and evaluated by over 700 companies. ”.

While this is impressive itself, remember that Adobe Photoshop has 29 million users in 2022. If Omniverse catches on, it could approach similar numbers in 10 years.

Conclusion: Nvidia estimated a $300 billion TAM from ‘NVIDIA AI Enterprise Software’ & Omniverse Enterprise Software’. Current revenues stand at $2.1 billion. Nvidia’s estimate of 45 million designers and creators paying semi-annual subscription fees seems highly ambitious, taking into account Adobe Photoshop’s current 29 million user base. Even for Nvidia to reach half of Photoshop’s current user base would be feat. The goal is imagine the Internet, but in 3D.

While these numbers seem on the higher side, remember that the Omniverse is actually currently functional and being used by a lot of businesses to train their AI, design factory floors, creating a digital twin of the earth etc. In the absence of any alternative to Omniverse, these numbers are very credible.

But 10 years is a long time in this space so we would prefer to watch developments closely.

4. Automotive

The Automotive segment of Nvidia has been motoring along at a sedate 10% CAGR over the past 6 years. It currently stands at $0.56 billion in Revenues.

What is more exciting is that Nvidia already has $11 billion design win pipeline over the next 6 years.

We all know about Tesla’s prowess in the autonomous vehicles space. Traditional car companies are turning to products like Nvidia’s DRIVE (a full-stack open platform for AV development) to catch up.

It is a long road ahead as the earliest models of Full Self Driving cars will start getting launched only around 2024.

While Nvidia has partnerships in place with all the traditional auto makers (Mercedes, JLR, BMW, Volkswagen etc), competition is everywhere. There has been a Cambrian explosion in startups specializing in AI. This is a rapidly evolving space and Nvidia’s lead cannot be taken for granted.

Conclusion: Nvidia estimated a $300 billion TAM in ‘Automotive’ segment. This is the most ambitious segment with current 2022 Revenues standing at $0.5 billion. Nvidia has made a good start with an $11 billion pipeline. In a world Nvidia has imagined, there are 100M vehicles/year hardware opportunity in automobiles. This assumes a significant growth in global auto industry from the current 66 million automobiles.

That said, Nvidia could be in a position to be the Autonomous Vehicle’s version of Android for mobile devices. Tesla’s competitors will be wary of taking up any Tesla offering even if Tesla offers its services to competitors. Competition is intense but the traditional auto makers seemed to have bet their horses on Nvidia.

5. OEM & Others

This segment is around 7% of Revenues and is not expected to generate recurring revenues of any significance.

Revenue from Cryptocurrency Mining Processors (CMP) contributed $550 million in fiscal year 2022. With the crash of Crypto in 2022 and Ethereum moving to Merge, the demand for Nvidia GPUs to mine Crypto is expected to be nil.

Till 2018, Nvidia used to receive licensing revenue from Intel that totaled $1.5 billion over 10 years.

That said, new revenue lines are opening up:

Large Language Model (LLM) Cloud Services to Advance AI and Digital Biology
Jetson Orin Nano for Robotics
IGX Edge AI Platform for Safe, Secure Autonomous Systems for AI at the Edge

Conclusion: Nvidia estimates a $150 billion TAM as part of ‘Chips & Systems’. This could be a giant leap as Nvidia currently sells GPUs for different purposes. The future could see it transitioning into a full-stack solutions offering that sells chips (CPUs, GPUs, DPUs), Software Development Kits (SDKs), Language Models, Omniverse simulation environment for Robotics and Autonomous driving, switches and network equipment etc. The revenues from this segment are difficult to gauge as currently the revenues go to other segments.