NVIDIA: A Fantastic Company with Strong Verticals

NVIDIA Overview

NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high-performance computing (HPC), gaming and virtual reality (VR) platforms.

NVIDIA’s GPU success comes from its parallel processing capabilities supported by thousands of computing cores, which are necessary to run deep learning algorithms. The company’s GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.

Santa Clara, CA-based, NVIDIA reported revenues of $10.92 billion in fiscal 2020, down approximately 7% from fiscal 2019.

NVIDIA dominates the Data Center, professional visualization and gaming markets where competitors such as Intel and Advanced Micro Devices are playing a catch-up role. The company’s partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.

NVIDIA’s GPUs are also getting rapid adoption in diverse fields ranging from radiology to precision agriculture. The company’s GPUs power the top two supercomputers in the world, located at Oak Ridge and Lawrence Livermore National Laboratories in the United States, as well as the top supercomputers in Europe and Japan. In all, NVIDIA powers 136 of the TOP500 supercomputers.

Beginning first-quarter, NVIDIA started reporting revenues under two segments — Graphics and Compute & Networking.

Graphics include the GeForce GPUs for gaming and PCs, the GeForce NOW game-streaming service and related infrastructure, and solutions for gaming platforms; Quadro GPUs for enterprise design; GRID software for cloud-based visual and virtual computing; and automotive platforms for infotainment systems.

Compute & Networking comprises Data Center platforms and systems for AI, HPC, and accelerated computing; DRIVE for autonomous vehicles; and Jetson for robotics and other embedded platforms. Inclusion of Mellanox revenues in this segment beginning second-quarter fiscal 2021.

Graphics and Compute & Networking accounted for 61.9% and 38.1% of first-quarter fiscal 2021 adjusted revenues, respectively.

Reasons To Buy NVIDIA

Growth opportunities in ray-traced gaming, rendering, high-performance computing, AI and self-driving cars are encouraging.

  1. NVIDIA is gaining a decent market share among the gaming service providers. The strong line-up of advanced graphics cards has made it a favourite graphics card provider among the PC makers. A strong uptick in PC gamers, esports players and higher spending on the gaming GPUs are key catalysts. Further, NVIDIA’s Turing GPU and its real-time ray tracing technology are witnessing a massive adoption. To propel wider embracement, NVIDIA is enabling ray tracing backup to several GeForce GTX GPUs, which is likely to lend developers a massive installed base of gamers. Moreover, the launch of GeForce RTX SUPER GPUs is expected to strengthen its leadership in the high end of the market. The company announced that the increasing number of blockbuster AAA titles have pledged support for NVIDIA RTX ray tracing technology. Notably, Microsoft teamed up with NVIDIA to add real-time ray tracing technology to Minecraft. Moreover, Activision Blizzard’s Call of Duty: Modern Warfare, Ubisoft Toronto’s Watch Dogs: Legion and Tencent NExT Studios’ Synced: Off Planet have also adopted RTX.
  2. Datacenter presents a solid growth opportunity for the company. As more and more businesses are shifting toward the cloud, the need for data centres is increasing. To cater to this huge demand, data centre operators like Amazon, Microsoft and Alphabet are expanding their operations across the world, which is driving demand for the GPUs. This bodes well for NVIDIA’s uptrend as well. Further, the company intends to focus on new growth boosters for its data centres business, such as inference, data science and machine learning techniques to consolidate its presence in this niche market. NVIDIA anticipates datacenter TAM to more than double to $50 billion by 2023. Considered most preferred by the data centre operators, NVIDIA’s GPUs are likely to help the company grab a larger market space. The company’s recently announced acquisition of Mellanox is a key catalyst in this regard.
  3. Increased Innovation and Improvements to Aid Merchants Experience. NVIDIA’s GPUs are rapidly benefiting from the proliferation of AI. By applying its GPUs in AI models, the company is expanding its base in the other untapped markets like automotive, healthcare and manufacturing, which will support its earnings and revenues. The company is engaged with a number of organizations including the top cloud server companies like Amazon, Baidu and Facebook, which are infusing AI in various applications. NVIDIA has also partnered with the industry biggies — IBM, Microsoft and SAP in order to bring AI to the enterprise users’ table. The company recently collaborated with the top-ranked OEMs including Dell, HP and Lenovo to deliver powerful workstations inclusive of Quadro RTX GPUs and its new CUDAX AI accelerated software. Moreover, a steady ramp-up of the new products is enabling the company to gain a competitive edge over the likes of AMD and Intel, and also widen its market share.
  4. NVIDIA’s foray into autonomous vehicles and other automotive electronics space is a plus. The company currently is on a firmer footing in the autonomous vehicle market. It is working with more than 320 automakers, tier-one suppliers, automotive research institutions, HD mapping companies and start-ups to develop and deploy AI systems for self-driving vehicles. Notably, NVIDIA’s focus on incorporating AI into the cockpit for infotainment systems is allowing it to grow its autonomous driving revenues. The company expects its automotive TAM to be $30 billion by 2025, which comprises $25 billion for driving, $3 billion for training/development of deep neural networks and $2 billion for validation and testing.
  5. NVIDIA is a cash-rich company with a strong balance sheet. As of Jul 26, 2020, the company had cash and cash equivalents of nearly $10.98 billion, which is significantly higher than its total debt of $6.96 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders.
  6. NVIDIA boasts a sturdy cash-flow generating ability. The company’s accelerated revenue growth along with improving operating efficiency is bringing in higher cash flows. The higher cash flow generating ability lends NVIDIA flexibility to invest in the long-term growth prospects and return money to its shareholders. Notably, NVIDIA returned approximately $6 billion to shareholders through dividend payments and share buybacks in the last five fiscals. In 2019, the company committed to returning $3 billion to shareholders. In the first half of fiscal 2021, NVIDIA paid dividends of $197 million. Moreover, NVIDIA is evaluating the timing of resuming share repurchases. The company is currently authorized to repurchase up to $7.24 billion in shares through December 2022.

Reasons To Sell NVIDIA

The adverse impact of coronavirus outbreak on the economy, bleak demand for the automobile infotainment system, forex headwinds and stiff competition from AMD are major headwinds.

  1. Although the data centre business has a tremendous growth scope the near-term headwinds make me anxious, due to a temporary pause in spending by data centre customers. Increasingly watchful behaviour of customers across the broad-based vertical markets and geographies due to coronavirus-led economic volatility poses a threat to NVIDIA, at least in the near term.
  2. Recent developments like the suspension of test drives for all its driverless vehicles and the absence of demand from cryptocurrency miners make me slightly alert about the company’s short-term functions. The discontinuation of mid-range Pascal GPU shipments for stabilizing the channel-inventory levels is a major headwind to its gaming revenues. Moreover, the coronavirus outbreak has negatively impacted demand for the automobile infotainment system. Autonomous development infrastructure builds have also declined and their negative impact are likely to continue for the next several quarters, which is a concern.
  3. The competition between NVIDIA and AMD has taken a meaningful turn. Previously, NVIDIA and ATI made graphics chips for the PC market. Later AMD acquired ATI and combined the CPU and parallel graphics chip into a single component. AMD is now making an effort to strengthen its position in the commodity graphics segment and CPUs for console gaming systems. AMD chips have made an entry into Sony’s PS4. Nintendo’s Wii U and Microsoft’s Xbox One will also be going with AMD. NVIDIA also has limited scope for growth in the apps processor market as it is dominated by Apple, Samsung and Qualcomm. I believe that competitive pressure from two CPU vendors, Intel and AMD, who are planning to integrate graphics cores into their chips can negatively impact NVIDIA’s revenues in the long haul.
  4. Further, a substantial portion of the company’s sales is derived from outside the United States. Notably, sales revenues to customers outside the United States accounted for 87% of the total revenue for each of the last three fiscal years. Hence, I believe that any unfavourable currency fluctuation and an uncertain macroeconomic environment may moderate the company’s growth.

NVIDIA’s Earnings and Revenue

NVIDIA Q2 Earnings Call

The company has delivered second-quarter fiscal 2021 non-GAAP earnings of $2.18 per share. The reported figure also surged 76% year over year. Moreover, the bottom line increased 21% sequentially.

Revenues of $3.87 billion jumped 50% year over year as well. The top line also climbed 26% sequentially.

The COVID-19 pandemic has negatively impacted the company’s professional visualization and automotive businesses. Nevertheless, strong data-centre and gaming performances offset these negatives to a large extent.

Graphics accounted for 54% of revenues. The segment top-line figure grew 16% year over year and 9% sequentially. Compute & Networking represented 46% of second-quarter fiscal 2021 revenues.

Compute & Networking revenues soared 130% from the year-ago quarter and 52% sequentially.

Gaming revenues (43% of revenues) were up 26% year over year and 24% quarter on quarter to $1.65 billion driven by higher sales across the company’s major gaming products. During the fiscal second quarter, the firm ramped up more than 100 new GeForce laptops for students, creators and gamers across different price points.

Revenues from Data Center (45% of revenues) soared 167% year over year and 54% sequentially to $1.75 billion. This upswing was driven by solid demand from hyper-scale and vertical industry end customers. Mellanox contributed 30% to data-centre revenues and 14% to the company’s overall revenues.

Professional Visualization revenues (5% of revenues) plunged 30% year over year and 34% sequentially to $203 million.

Automotive revenues (3% of revenues) in the reported quarter totaled $111 million, down 47% on a year-over-year basis and 28% sequentially.

OEM and Other revenues were up 32% year over year and 6% sequentially to $146 million (4% of revenues). This year-over-year growth primarily resulted from higher demand for entry-level laptop GPUs from PC OEMs.

NVIDIA’s gross margin expanded 5.9% from the year-ago quarter to 66%, reflecting higher data-centre products and a favourable GeForce GPU product mix.

Operating expenses were up 38% YOY and 26% sequentially to $1.04 billion on the Mellanox acquisition-related costs.

Operating income soared 89% year over year and 26% sequentially to $1.52 billion.

As of Jul 26, 2020, NVIDIA’s cash, cash equivalents and marketable securities were $10.98 billion, down from $16.35 billion as of Apr 26.

As of Jul 26, total long-term debt $6.96 billion, flat with the fiscal first quarter.

Cash flow from operating activities increased 67.3% year over year and 72.2% sequentially to $1.57 billion. Free cash flow was $1.35 billion, up 63.9% year over year and 78.9% sequentially. In the first half of fiscal 2021, the company generated operating and free cash flows of $2.48 billion and $2.1 billion, respectively.

In the second quarter, NVIDIA paid dividends of $99 million. The company remains committed to paying its quarterly dividend. During the first half of fiscal 2021, the company returned $197 million in dividend to shareholders.

For the third quarter of fiscal 2021, NVIDIA anticipates revenues of $4.4 billion (+/-2%).

Non-GAAP gross margin is projected to be 65.5% (+/-50 bps). Non-GAAP operating expenses are expected to be $1.54 billion.

Capital expenditures are expected to be approximately $225-$250 million.

NVIDIA is focused on revolutionary technologies increasing human aptitude and imagination.

From researchers who use NVIDIA’s GPUs to accelerate a wide range of important applications, from simulating molecular dynamics to weather forcasting. To gamers, who choose NVIDIA’s GPUs to enjoy immersive, increasingly cinematic virtual worlds.

The world’s leading cloud service providers such AWS and Azure use NVIDIA’s GPUs to enable, accelerate or enrich the services they deliver to billons of end-users, including search, social networking, online shopping, live video, translation, AI assistants, navigation, and cloud computing.

Furthermore, enterprises and startups use NVIDIA’s GPUs for deep learning that surpasses human perception, in fields ranging from radiology to precision agriculture.

At its core, NVIDIA is looking to innovate and become a platform. NVIDIA is bringing together hardware, software, programmable algorithms, libraries, systems and services to create unique value for their end-markets.

NVIDIA reported better-than-expected Q2 results. The company is benefiting from the coronavirus-induced work from home and learn-at-home wave. NVIDIA is also benefiting from strong growth in GeForce desktop and notebook GPUs, which is boosting gaming revenues. Moreover, a surge in Hyperscale demand remains a tailwind for the company’s Data Center business. Expansion of NVIDIA GeForce NOW will drive user base. Additional, solid uptake of AI-based smart cockpit infotainment solutions is a boon. Further, collaboration with Mercedes-Benz will solidify NVIDIA’s presence in the Autonomous Vehicles and other automotive electronics space. However, management expects COVID-19 pandemic to negatively impact near-term revenues by $100 million. Moreover, the U.S.-China trade war remains a key concern.

NVIDIA Q2 2020 Results, NVIDIA 2019 10-K, Zacks.com and predictions made by the Author’s understanding of the company.

This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.

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Sai Penukonda

Sai Penukonda

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