Nvidia Datacenter Segment Leading Company Back to Growth
Shares of NVDA were down 1% after hours following the company’s October quarter report. It’s worth noting, in the past three months shares are up 37%. We remain long-term positive on the Nvidia story given the company’s 3-5 year opportunity in providing GPU’s for datacenters and machine learning applications. Beyond five years, we expect autonomous mobility applications will support continued 15% plus revenue growth. Our takeaways from the quarter:
- Return to growth: Nvidia’s business will return to mid 30% revenue growth in Jan-20, after being down by an average of 17% over the previous 3 quarters. The return to growth is largely due to channel clean up within the gaming segment along with strength in datacenter. The Jan-20 revenue growth pace should be sustainable given the company is entering a year of easier comps following the crypto business 2019 bust.
- Soft Guidance: Jan-20 revenue guidance was 2% below the Street, attributed to softness in the gaming segment mostly offset by strength in datacenter. Gross margin guidance for Jan-20 was better than expected at 64.5%, vs 64.1% in Oct-19. As a point of reference, these margins are higher than Intel at 59% and AMD at 43% in their most recent quarters. The company noted to expect gross margins to further expand in calendar 2020 due to Nvidia’s transition to 7nm manufacturing at TSMC.
- Gaming: (down 6% y/y, accounting for 55% of revenue): Gaming was better than expected driven by RTX sales. As mentioned, the gaming business is expected to soften in Jan-20 due to seasonality from OEMs including HP, Dell, and Lenovo. Specifically, demand that would normally have fallen into the January quarter was pulled in the October quarter. Importantly, the gaming segment demand over the combined October and January quarters is essentially in line with expectations.
- Datacenter: (up 7% y/y, accounting for 24% of revenue): The majority of the earnings call was focused on the datacenter opportunity. Demand for datacenter products is being driven by hyperscaling for training and inference AI algorithms. For example, natural language-based interfaces (Apple Siri, Google Voice, Amazon Alexa) are powered by cloud computing hardware optimized with Nvidia GPUs which reduce latency. We expect datacenter to be the largest revenue segment in the next 3-5 years.
- Auto: (down 6% y/y, accounting for 5% of revenue): Today about half of auto revenue is related to infotainment and half is related to autonomous driving hardware. The infotainment center business is declining slightly compared to the autonomous driving segment which is growing at lumpy rates. On the call, the company suggested autonomous driving segment growth slowed measurably given major car OEMs are years away for rolling out autonomy at scale. Aside from Tesla, Nvidia’s hardware remains imbedded in all major car OEMs autonomy solutions. We advise patience when considering the auto segment opportunity and expect in 5 plus years, it will become an increasingly important part of the story.