Nvidia Posts April Results; Continues to Advance Frontier Tech

  • Nvidia reported April earnings after the close today. Shares of NVDA are down 3% in after-hours trading given the company missed Datacenter revenue by a fraction of a percent. High growth stories have high bars to clear, and the company failed to exceed expectations in the Datacenter segment. Keep in mind, shares of NVDA have appreciated 20% in the past month.
  • That said, the Nvidia story is intact, and remains one of the best-positioned tech names for the next decade, as its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, gaming and eSports.

What’s New? First, we’ll start with the bad news. Nvidia’s Datacenter growth has continued to slow, growing at 71% y/y vs. 186% y/y growth a year ago. Analysts expected Nvidia’s Datacenter to reach $703M in Q1, while it only reported $701M in the segment.

In addition, Nvidia offered more clarity around the impact that cryptocurrency mining is having on its business. Nvidia’s OEM and IP business grew 148% y/y due to the addition of cryptocurrency mining specific products. Despite stronger than anticipated impact from cryptocurrency mining, Nvidia does not expect this tailwind to continue. Nvidia shared that it believes OEM and IP to be 1/3 it’s Q1 level going forward.

Our GPU prices are normalizing, allowing gamers who had been priced out of the market to get their hands on one. Cryptocurrency demand was stronger than expected but we were able to fill it with crypto-specific GPUs. – Nvidia CFO Colette Kress

Earnings and model recap. Nvidia reported Apr-18 revenues of $3.21B vs. Street at $2.89B (up 66% y/y), and EPS of $2.05 vs. Street at $1.46. Updated model here.

What’s Next? We are still believers in the Nvidia story and want to reiterate our belief in three key catalysts for Nvidia’s growth.

1. Gaming – Demand for core gaming business products remains strong. Tonight’s call highlighted the impact that the Battle Royale game mode has had on the gaming market.

Bottom line, Fortnite is a home run, PUBG is a home run… Battle Royale is incredibly social and sticky. More gamers play, and more of their friends join. It’s a positive feedback system. – Jensen Huang

Gaming demand remains strong for Nvidia. Jensen shared positive feelings that Nvidia would be able to continue to fill channel inventory of graphics cards, helping normalize the price for gamers.

2. Datacenter – Companies are adopting artificial intelligence in order to remain competitive. Nvidia’s datacenter business saw triple-digit growth for the seven consecutive quarters, and 71% in the April quarter. A big part of this growth is due to the expanding use of artificial intelligence by companies, specifically deep learning. On tonight’s call, Jensen expressed his pleasure with Nvidia’s Volta architecture, with it being the first GPU designed specifically for deep learning. Volta architecture chips shipped to cloud customers in the last quarter. While the Volta chips have been used internally for qualification, for the most part, they are beginning to open up to external cloud customers.

3. Automotive – The market for autonomous vehicles will be bigger than most people think. Nvidia’s opportunity in the automotive space is bigger than many anticipate. As stated in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. On tonight’s call, Jensen Huang re-iterated his belief that everything that moves will be autonomous, or have autonomous capabilities. This includes cars, taxis, agriculture, and pizza delivery equipment. Jensen shared that he anticipates driverless taxis to go to market in 2019, with autonomous cars going to market in 2020 or 2021.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

How To Think About Recent Volatility in Tech

Market decline does not change the mega growth opportunities. The heart rate of the market increased the past week because of fears of a trade war, Facebook data privacy, and broken market technicals, but the health of the market is unchanged and the health is good. Core underlying tech trends including artificial intelligence, robotics, big data, and autonomous transportation, will support continued growth.

Hold tech for the long-term. We believe that tech is essentially taking over the rest of the economy; therefore, investors should hold tech long term. Just as every company is now an internet company to some degree, we believe that eventually every company will be an AI company.

Market undervalued. From a valuation perspective, our view is undervalued. The market has rallied back to the old highs, but the S&P is up only 3% per year over the past 17 years, compared to the previous 17 years (1983-2000) when it was up 17% per year.

Putting the size of tech into perspective. The tech sector’s growing clout is not just a U.S. story. Tech stocks have become so dominant in emerging markets that for the first time since 2004, the industry last year overtook finance as the biggest sector in the MSCI Emerging Markets Index. Tech had a 28% weighting near the end of 2017, more than double its level six years ago, according to data provided by MSCI. Facebook, Amazon, Netflix Inc. and Alphabet together account for a 7.8% weighting in the S&P 500, more than double from five years ago.

Company Updates:

Tesla. We remain positive on TSLA. Shares are down 20% in the past month mostly due to fears of another miss in Model 3 production. The recent stock dive is due to a combination of a Model X accident that is being investigated, Waymo’s partnership with Jaguar, which legitimizes a key competitor (the I-Pace electric SUV), growing concern among all companies testing self-driving vehicles amid the Uber fatality, and news that Moody’s has downgraded Tesla’s bonds to B3 from B2, citing significant shortfall in the Model 3 production rate and a tight financial situation. We continue to believe the Tesla story has the best risk-reward among tech companies over the next 5 years.

  • Model 3 production. We’re expecting another miss in Model 3 production in the March quarter but that does not change the story. There is more demand than supply for the Model 3 (about 400k preorders which is unheard of in automotive). It might take a year, but eventually, Tesla will get the Model 3 production right, and ramp output.
  • Model X accident. We see the recent Model X accident the same as accidents with gas cars. It is unlikely that the battery or Tesla’s advanced cruise control “autopilot” were to blame. Tesla disclosed that the autopilot feature properly functions 200 times a day on the same stretch of road where the accident happened.

Facebook. Limited upside to FB. Given the privacy issues, for the first-time advertisers have to think about Facebook as a liability. Separately, it’s unclear about how the recent privacy changes will impact Facebook’s ability to make money.

Nvidia. We remain positive on NVDA. Shares of NVDA dropped 11% in the past week following the announcement that they temporarily stopped autonomous testing, and in part because of the broader market sell off. While the company did not comment on timing, we expect testing to resume in the next 3 months. The big picture is the company is well positioned to capitalize on four mega trends, AI, autonomous cars, gaming, and blockchain through their dominance of GPU processors.

Apple. We remain positive on AAPL. Concern is emerging that iPhone demand in June will fall below Street expectations. We think iPhone demand over the next two quarters is not important to the story. What’s important is the share buyback, services, and the next iPhone.

  • Share buyback. Apple can add 4% per year to the stock price (assuming they use $40B of the $55B they generate in cash each year to buy back stock). Apple will give an update on the share buyback when they report the March quarter, likely late in April.
  • Bigger screen iPhone this fall. We expect Apple will announce a 25% bigger phone in the fall. This will be a positive for unit demand and average selling price.
  • Services. Services account for about 15% of revenue and are growing at 15-20% year over year. We believe this segment will continue to grow at a 15% or better rate over the next five years. This is important because the earnings multiple on shares of AAPL will likely increase as investors view the predictability of services are more attractive.

Google. We remain positive on GOOG. We expect the next six months to be rough for shares of GOOG as questions emerge about how the company uses data. Despite that negative potential, Google is too tightly woven into the fabric of the internet. The company is one of the best ways to invest in AI, given the company has a stated their intention to move from a mobile-first company to an AI-first company over the next several years. Lastly, the company has a stake in Waymo, the leading autonomous car company. We expect years of positive news to come from Waymo.

Amazon. We remain positive on AMZN. The company is best positioned for the future of retail. We see that future as a combination of both online and offline retail. Online sales account for about 15% of global retail, and in the future, we believe it will eventually reach 55% of sales. We also expect Amazon to do more with physical retail locations and we continue to believe the company will eventually acquire Target (TGT). The company’s AWS web hosting business is only 15% of revenue, but it is growing at greater than 30% for the next several years.

Twitter. Limited upside to TWTR. About 14% of Twitters 2017 revenue came from selling data, growing at 18% y/y, compared to Twitter’s ad business that declined by 6%. Selling private data is a toxic label, and this could limit the upside to shares over the next year.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Nvidia; Buy More GPUs, Save More Money

  • NVDA shares dropped 8% today on the announcement they temporary stopped autonomous testing and market sell off.
  • While the company did not comment on timing, we expect testing to resume in the next 3 months.
  • CEO Jensen Huang held a keynote today. The message was more GPU’s save money.
  • The company announced 5 new products targeted at AI, autonomy, and VR.

Nvidia started its GPU Technology Conference on Monday with their focus on AI & Deep Learning. On Tuesday, CEO Jensen Huang gave a keynote on Nvidia’s latest developments in a few key product categories, but Nvidia’s stock dropped by 8%. We attribute 2/3 of the decline to the company announcing they’ve temporary stopped autonomous vehicle testing until they receive a diagnostic report from the Uber accident last week, and 1/3 from the broader tech sell off.

Buy more GPUs, save more money. The message from Jensen Huang was if you buy Nvidia’s GPUs, you can save money. The idea is using an Nvidia architecture requires less hardware that consumes less energy.  That said, users of these systems are solving more advanced problems like AI, which will require an increase in total spending. We remain comfortable with our Nvidia revenue growth estimates of 31% in CY18 and 21% in CY19.

New Products. Nvidia made product announcements today:

  • RTX (AI and blockchain). On the workstation front, the company announced the Quadro GV100 with (real-time ray tracing) RTX Technology. The RTX technology offers a measurable improvement in rendering times.
  • DGX-2 (AI and blockchain). Nvidia also announced the DGX-2 platform for AI. The DGX-2 claims to be the first to offer 2 Petaflop single server deep learning system. Nvidia compared this platform to a traditional hyperscale center, which would have 300 dual-core CPUs and cost about $3M. The DGX-2 is may seem expensive at $399K, but it takes up 1/60th of the space and consumers 1/18th of the power.
  • Isaac SDK (AI) Adding artificial intelligence to robots for perception, navigation, and manipulation. Nvidia showed a video of one of its first Isaac projects, a two-wheeled delivery robot named Carter.
  • Drive Orin (Autonomy). Drive Orin is comparable to two Drive Pegasus supercomputers while being smaller in physical size. Jensen shared that many customers were including two Drive Pegasus chips in each vehicle, and it made sense to package the same computing power into one product.
  • Drive Constellation (Autonomy). This is a datacenter solution used to test and validate self-driving vehicles in virtual reality.
  • Project Wakanda (VR). See details below.

Nvidia committed to an autonomous future. Given the Tempe accident, Jensen spent most of the self-driving segment of the keynote talking about the importance of safety, and why fully-autonomous future means safer transportation. He also reiterated this his belief that self-driving cars are “probably the hardest computing problem that the world has ever encountered”.  The company did not give a timeline of when testing will resume, but given the hold is based on the Uber review, we would expect it to take a few months. Autonomous simulation will play an increasingly important role in the future. Drive Constellation can run thousands of virtual worlds, each while running thousands of scenarios in order to collect more data. For example, 10,000 constellations can simulate about 3 billion miles in a year, significantly more than 5-10 millions driven each year by the current fleets of test vehicles.

Project Wakanda hints at the future of relationship between man and machine. Nvidia closed the keynote by unveiling what has been dubbed “Project Wakanda.” Similar to what we saw in Black Panther, Jensen showed a driver operating a vehicle in virtual reality, while sitting in a fully-equipped cockpit. Next, a third screen appeared and showed a driverless car at a remote location.

While Nvidia didn’t share much about its direction with this project, Jensen did share that he views virtual reality as a way to provide humans with teleportation – augmented with autonomous machines.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Nvidia Results: Intoxicating Combination of Faster, More Profitable Growth

What’s new. Shares of NVDA are up 7% after hours as the company reported an intoxicating combination of faster, more profitable growth. What’s new?  Tonight’s results are further evidence of the magnitude of the opportunity ahead of Nvidia. Its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, and eSports. We remain believers in the long-term Nvidia story. While shares of NVDA are up 100% over the past year (market cap of $129 billion), we think there’s further upside given Nvidia’s foundational exposure to frontier technologies.

Earnings and model recap. Nvidia reported Dec-17 revenues of $2.9B vs. Street at $2.7B (up 34% y/y), and EPS of $1.72 vs. Street at $1.16. Updated model here.

Pole position in three green field growth markets: As we’ve written about previously, gaming, datacenter, and automotive, all have open-ended growth opportunities.

1. Gaming

Nvidia’s gaming business revenue was $1.74B, up 29% y/y. This was driven by high-quality, hit games in the market, notably PlayerUnknown’s Battlegrounds (PubG), Destiny 2, Call of Duty WWII, and Star Wars Battlefront II. PubG has reached 30 million players in 9 months, two months faster than Activision’s Overwatch. It’s worth noting the new Overwatch league launched last month and recorded 10 million unique users in its first week. The success of these games is leading to both an increase in the number of GPUs sold, as well as ASPs for Nvidia.

Additionally, demand for GPUs for cryptocurrency mining has boosted Nvidia’s gaming segment results. The rise in cryptocurrency demand has contributed to historically low channel inventory levels of GPUs being reported.

Long-term, the outlook for gaming remains promising.

I’ve always believed that the video game market is going to be literally everyone. In 10-years’ time, 15-years’ time there’s going to be another billion people on earth. And those people are going to be gamers. Not to mention that, almost every single sport could be a virtual-reality sport. – Jensen Huang

Part of the upbeat guidance for the April quarter is because gaming channel inventory is at historically low levels and the company expects to fill channel inventory during the quarter.

2. Datacenter

Nvidia’s datacenter revenues were $606M, up 105% y/y. For the 7th consecutive quarter, Nvidia’s datacenter revenues saw three-digit growth.

Driving datacenter growth are investments in artificial intelligence from a broad range of companies. Nvidia commented on the earnings call that every major cloud provider, including Alibaba, Amazon, Baidu, Google, IBM, Microsoft, Oracle, and Tencent have adopted Nvidia’s Tesla V100 GPUs for training deep learning networks.

We’re in the early innings artificial intelligence and just as all companies evolved to be internet companies in the early 2000s and mobile companies in the late 2000s, they will soon evolve to be AI companies.

3. Automotive

Nvidia’s automotive revenue was $132M, up 3% y/y. Despite little growth, remains Nvidia’s biggest opportunity. On tonight’s call, Jensen Huang outlined three near-term opportunities in Automotive:

  1. Nvidia’s DGX system is used to train neural networks for autonomous driving at data centers.
  2. Nvidia’s DRIVE PX platform provides cars with the necessary on-board computing strength for autonomous capabilities.
  3. Nvidia is reaching development agreements with major OEMs, ride-hailing companies, startups, tech companies, and many others to support their efforts in autonomy. Each project is engineering intensive, and companies rely on Nvidia for help.

Longer-term, the market for autonomous vehicles will be larger than most people think. Today, automotive accounts for 6% of revenue, and we expect it to rise to 13% by 2023. As we outlined in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. 

Transportation is a $10 trillion industry. Between cars and shuttles and buses, delivery vehicles, I mean, it’s just an extraordinary, extraordinary market. Everything that’s going to move in the future will be autonomous. – Jensen Huang

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Nvidia Foundational Player In Future of Tech; Introducing 5-Yr Model

Today we’re rolling out our 5-year model for Nvidia, joining Loup Ventures’ Apple, Tesla, and iRobot model coverage. It’s important we write on Nvidia given its products are an integral part of the future of technology, based on their use in datacenters, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining and eSports. We’re believers in the long-term story of Nvidia. While shares of NVDA has performed exceptionally well this year, up 100% YTD (market cap of $129 billion), we think there is further upside given Nvidia’s foundational exposure to frontier technologies.

25+% CAGR Story Through 2023. We expect Nvidia’s core gaming business to continue to grow, but decrease as an overall percentage of revenue (57% today, to 41% by 2023). In addition, we see Nvidia’s datacenter and automotive segments taking second and third place, growing to 36% and 14% of revenues respectively.  We believe Nvidia will see 20+% annual revenue growth through 2023, driven primarily by four catalysts:

Catalyst #1 – Demand for core gaming business products remains strong.  Historically, Nvidia has been known for providing high-quality GPUs for gaming. Nvidia was well-known in the PC gaming space in the mid-t0-late 1990s, and even won the contract to provide graphics hardware for the original Microsoft Xbox. Nvidia has maintained its leadership in the space, and stands as the go-to GPU component for gamers. Despite competition from AMD, ASUS, and Intel, Nvidia has remained a leader. In addition there are two trends that add to the growth of Nvidia’s gaming business:

ESports continues to rise in popularity. Newzoo expects the ESports market to reach $1.5B by 2020, up from $696M in 2017. Not only are more users participating in ESports, but more advertisers are flocking to the industry as well.

Gaming is becoming more social. This is driving engagement and bringing more people on to various platform, including PC platforms where Nvidia’s products are often used. While this can partially explain the rise in ESports, the trend impacts users that opt out of participating in eSports in favor of playing with their friends. Most platforms are spending more time creating online communities where users can interact with each other. Separately, with more kids using tablets and mobile phones at an early age, the exposure and transition to gaming is greater than ever before. As parents continue to let devices act as virtual babysitters, the number of children that get into gaming grows.

Catalyst #2 – Companies are adopting artificial intelligence in order to remain competitive. Nvidia’s datacenter business (20% of revenue today, to 36% by 2023) has seen triple digit growth for the past six quarters. A big part of this growth is due to the expanding use of artificial intelligence by companies, specifically deep learning. Even more positive for Nvidia, we are only in the early innings of the game. Just as all companies evolved to be internet companies in the late 1990s and early 2000s, and mobile companies in the late 2000s, they will soon evolve to be AI companies. On Nvidia’s last earnings call, CEO Jensen Huang shared:

“…Artificial intelligence and its emergence and applications to solving problems that we historically thought were unsolvable. Solving the unsolvable problems is a real realization. I mean, this is happening across just about every industry we know, whether it’s Internet service providers, healthcare, manufacturing, transportation, logistics, you name it.” – Jensen Huang

We expect Nvivia’s datacenter segment to continue to see high growth as companies rely more on artificial intelligence. By 2023, we expect Nvidia’s datacenter business to account for over one-third of its revenues and be growing at 30% annually.

Catalyst #3 – The market for autonomous vehicles will be bigger than most people think. Nvidia’s opportunity in the automotive space (6% of revenue today, to 14% by 2023) is bigger than many anticipate. As stated in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. Nvidia’s products are used in two different instances as it relates to autonomous vehicles. First, Nvidia’s DGX system is used to train neural networks at data centers. Second, Nvidia’s DRIVE PX platform provides cars with the necessary on-board computing strength for autonomous capabilities. Currently, Nvidia has partnered with Toyota, Mercedez-Benz, Audi, Volvo, and Tesla, among other. We see the ramp of autonomous vehicles beginning in late 2020 as autonomous taxis enter the field, and further expanding in 2021 as autonomous consumer vehicles enter the market. By 2023, we expect Nvidia’s automotive segment growth to accelerate from 16% in 2017 to 100% y/y in 2023. 2023 is only the beginning of autonomous vehicles, and Nvidia’s automotive segment will continue to accelerate past the 5-year window. Based on our auto outlook, we feel 2028 is the year where there will be an influx of demand for level 4 and level 5 autonomous vehicles. We expected Nvidia’s automotive segment growth will continue to accelerate until that time.

Catalyst #4 – Nvidia has planted seeds in other industries with bright futures. OEM & IP is 8% of revenue today, to 3% by 2023.

Virtual Reality. Nvidia’s GPUs are a core component for virtual reality solutions. Today, high-quality VR solutions require a headset tethered to a desktop or laptop computer, which are often running off of an Nvidia GPU. While we believe that VR content will move to standalone devices in the future, those devices will still require enough processing power to delivery high-quality experiences. Nvidia’s solution, the Tegra mobile processor line, is currently a leading option for manufacturers. Nvidia is well-positioned to benefit from the growth of virtual reality gaming, as its products are used in three (mobile, PC-based, standalone) of the four VR solutions, missing out on only console-based VR; for now.

Augmented Reality. We’ve written many times before about the future of augmented reality and the impact that it will have on how we interact with the world in the future. Similar to VR, AR requires sufficient computing capacity on any device. As the market for AR develops, Nvidia will benefit as either a manufacturer of specific solutions for customers, or tangentially through expanding cloud use for deep learning algorithms used by AR applications.

Cryptocurrencies. Lastly, Nvidia is poised the benefit from the continued growth of cryptocurrencies. Cryptocurrencies require individuals to dedicate computing power to the the blockchain, those that do are referred to as miners. Miners often turn to GPUs for the necessary processing power to complete blocks on the blockchain. Here is an explanation of how mining works, and why it is necessary.

If you read that article, your reaction might match James Franco’s above. Putting it another way, miners rely on GPUs to provide a cryptocurrency network with the necessary processing power to function. As a particular cryptocurrency is mined (with GPUs), customers will ask for specific ASICs to be built by companies such as Nvidia (positively impacting OEM and IP). As these custom ASIC components are deployed, the specific coin’s mining market becomes monopolized, and forces smaller miners to move a different currency in order to remain profitable. The smaller miners will turn back to GPU-based solutions (positively impacting Gaming) before the cycle repeats itself. Because of this ebb-and-flow and the volatile nature of cryptocurrencies, modeling the impact of cryptocurrency mining is difficult. While highly speculative and volatile, we feel that cryptocurrencies will be a part of the future. We are modeling OEM and IP business to grow by the low single digits in the future.

Bottom Line. Artificial intelligence, autonomous vehicles, virtual reality, and augmented reality are technologies that will have a profound impact on our lives. As these technologies take hold, companies supporting the development of the underlying components are sure to benefit. Betting on Nvidia is betting on frontier technologies, and Nvidia has planted seeds in numerous areas that we are optimistic about. Despite competition from Intel and AMD, Nvidia will continue to be the dominant component supplier in various spaces.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.