Is NVIDIA Losing the Plot in This Critical Market Once Again?

NVIDIA (NASDAQ: NVDA) was supposed to win big from the automotive market, especially self-driving cars. The graphics specialist was an early mover in this space and was enjoying terrific financial success in the automotive market a few years ago, making it one of those tech stocks that could have helped you take advantage of autonomous cars.

But things started changing, and they aren't as rosy as they used to be. Worried woman looking at a laptop screen.

Image Source: Getty Images.

The auto business takes another hit

The fact that chips are just a commodity meant that NVIDIA's early-mover advantage in the automotive market didn't last for long. So the company had to go back to the drawing board and come up with a new strategy to ward off the ever-increasing competition in the market for automotive chips.

The new strategy of selling end-to-end automotive systems to OEMs (original equipment manufacturers) and automakers started paying off earlier this year. NVIDIA's self-driving platforms started gaining adoption, and its automotive revenue resumed moving north. But the company's latest results reveal that the automotive business has started losing momentum once again. Chart showing NVIDIA's auto segment revenue.

Data source: NVIDIA quarterly reports. Chart by author.

NVIDIA's third-quarter auto revenue dropped nearly 6% year over year. The company blamed the "general industry weakness" for the decline, as well as the fact that its legacy infotainment business has now come to an end. At the same time, NVIDIA management pointed out over the latest earnings conference call that its business with Daimler is getting better. According to CFO Colette Kress: "Our AI cockpit business grew, driven by the continued ramp of the Daimler as they deploy their AI-based infotainment systems across their fleet of Mercedes-Benz vehicles."

The company also highlighted its partnership with Optimus Ride, which launched the first autonomous-driving pilot project of New York in August this month. NVIDIA is powering Optimus' vehicles using its DRIVE platform in a bid to enable last-mile connectivity with the help of autonomous vehicles.

Now, there's no doubt that autonomous public transportation is a big opportunity for NVIDIA. The company could make a big dent in this space thanks to an army of 370 companies that are using the chipmaker's platform for autonomous car development. However, investors shouldn't expect consistent results until and unless self-driving cars start hitting the mainstream and NVIDIA's partners begin launching vehicles based on its platforms.

How long will NVIDIA have to wait for automotive glory?

NVIDIA didn't have much to say about the progress it is making in the auto business last quarter apart from a couple of things listed above. This is probably because the activity on the autonomous-car front might have slowed down thanks to the global weakness in auto sales.

Car sales dropped slightly last year, marking the first decline seen since 2009, as per a report by Fitch Ratings. Though the drop was a modest 0.1%, the fact that the auto industry has been clocking an average growth rate of 4.1% over the years indicates just how serious last year's weakness was. Moody's Investors Service, on the other hand, predicts a 3.8% decline in 2019 and a 0.9% drop next year.

The automotive weakness is bad news for NVIDIA, because automakers won't be inclined to spend on new and complex technology such as self-driving cars at a time when they are busy closing down plants and laying off workers. So the start-stop nature of NVIDIA's auto business could continue until there is a sustained turnaround in the automotive sector.

Moreover, the auto industry's bullishness about the arrival of self-driving cars has also taken a hit of late. It was widely believed that autonomous cars could start gaining traction from 2020 onward. But according to a J.D. Power survey, it seems as if self-driving cars are at least 10 years away from being sold in big numbers.

Even then, self-driving vehicles are expected to account for just 10% of total vehicle sales by 2034. As such, NVIDIA's automotive business might not move the needle in a big way for the company anytime soon.

The chipmaker currently gets just over 5% of its total revenue from the auto segment. And despite the segment's massive long-term potential, it could continue to play a small role in the bigger scheme of things for NVIDIA thanks to the challenges listed above.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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