Nvidia Is About to Change Gaming Forever With AI - The Motley Fool

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Nvidia Is About to Change Gaming Forever With AI - The Motley Fool

Nvidia's (NVDA 0.09%) explosive growth in its data center segment recently overtook gaming as the company's largest source of revenue. But gaming is still a large business, generating a third of Nvidia's total revenue in the most recent quarter. With over 1.7 billion PC gamers worldwide and growing, gaming is still an important growth driver for Nvidia that investors shouldn't forget about, especially as it continues to introduce advancements in gaming with artificial intelligence (AI).
The launch of Nvidia's real-time ray tracing technology in 2018 kicked off one of its strongest GPU upgrade cycles, but the era of new AI solutions means the best is yet to come. Nvidia just announced a new AI-based solution for game developers called Nvidia Avatar Cloud Engine (ACE) that stands to change how games are made and cement its enormous lead over Advanced Micro Devices. 
ACE is an exciting technology for gamers
Nvidia revolutionized gaming with the 2018 launch of the GeForce RTX gaming GPUs. The ray tracing technology in these graphics cards used AI to render more realistic scenes, but Nvidia is now using AI to add greater realism to in-game characters. 
Game characters using Nvidia's ACE use natural language models -- the processing technology behind OpenAI's ChatGPT. This will make the dialogue players see from non-playable characters, or NPCs, more dynamic and less scripted. NPCs will be able to respond intelligently to the player's dialogue choices, consistent with the NPC's narrative backstory.
Video games have been progressing toward this more immersive gaming experience for a long time, but Nvidia ACE could take video game realism to another level. NVIDIA ACE for games at Computex 2023. Image source: Nvidia. What does this mean for Nvidia's business
It's difficult to quantify what ACE will mean for revenue. Between fiscal 2018 and fiscal 2022, Nvidia's gaming revenue more than doubled to $12.4 billion.
However, ACE is a technology built inside of Nvidia's Omniverse development platform, which is used for the creation of 3D graphics and applications. Specifically, ACE is a foundry service, or cloud engine, running on Omniverse that developers can tap into when creating digital avatars or characters for video games.
ACE might impact the revenue growth of Nvidia's professional visualization segment, which includes Omniverse. The pro visualization business reported just $226 million in revenue last quarter. But taking all of the revenue Nvidia generates from graphics, including Omniverse and gaming chips, it totaled $11.9 billion in fiscal 2023, or 44% of the entire business.  Nvidia to competitors: Catch me if you can
ACE is another example of why Nvidia looks unstoppable right now. It already has a massive lead over AMD in the discrete GPU market, with an 84% market share. It's also estimated that Nvidia's share of the AI chip market is over 80%, although AMD could chip away at that lead as it ramps up investment in AI computing. It was just reported that Amazon is considering using AMD's AI chips for its cloud servers.
Ultimately, what makes Nvidia so dominant is the large installed base of 4 million developers that use its CUDA programming model and software libraries to build GPU applications. Nvidia knows what graphics artists and software developers need from computing hardware, and it delivers.
Nvidia's stock is expensive, trading at a forward price-to-earnings (P/E) ratio of 54. I wouldn't buy the stock just for the gaming opportunity alone, but a near-term recovery in graphics-related revenue is a catalyst for accelerating revenue growth on top of the strong demand coming for AI chips. While graphics revenue fell 25% last year, compute and networking, including data center chips, grew 36%.  
If both segments get rolling soon, that could support Nvidia's high P/E. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard has positions in Advanced Micro Devices and Amazon.com. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon.com, and Nvidia. The Motley Fool has a disclosure policy.

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