By Ophir Gottlieb
Spotlight Top Pick NVIDIA Corporation (NASDAQ:NVDA) crushed earnings expectations, but even further, showed that one of its ‘soon to be large businesses’ is, right now, ready for the world to take notice.
The Cloud – Data Center
When we first spoke about Nvidia, Intel owned 99% of CPU business in the cloud and personal computers, pushing Advanced Micro Devices to the side and dominating in a way we have seen very few times in technology when real competition was actually allowed (unlike Microsoft in 1998 (eh, hem)).
Intel still stands tall as the overwhelmingly dominant leader in CPUs, but Nvidia has GPUs – in fact, it invented them. And while this is not the story to review that technology, we do so in the original Top Pick dossier.
What very (very) few people recognized in late 2015 was that the GPU would actually hold a place in the cloud as well. Not as a competitor to Intel’s CPUs, but as a new usage, and in some cases, a far more valuable one. It’s this reality – that end-to-end machine learning, artificial intelligence and general deep learning are going to be one of the tent poles for the cloud – that has now turned into a sizable business for Nvidia and one that has simply staggering upside for all parties involved.
Here is the chart we always start with for the cloud:
We’re looking at a segment, for all players, that will reach half a trillion dollars by 2026 if forecasts hold.
In the United States, there are three dominant players:
Source: Anis Rahman
Facebook, too, has a massive cloud platform; it just isn’t public, and Nvidia powers that cloud as well.
Nvidia is included (available) in each of those platforms. But let us not be so obtuse to forget about the rest of the world, which is larger than United States.
On September 27, we noted that Nvidia had struck a deal where it will provide AI graphic processing chips to the three Chinese tech titans; Alibaba, Baidu, and Tencent.
Here’s a nice little snippet:
Alibaba Group Holding Ltd., Baidu Inc., and Tencent Holdings Ltd. are upgrading their data centers with Nvidia’s Volta-based platforms, which revolve around the V100 data center GPU, the company said in a statement.
The chip has 21 billion transistors and offers five times the performance over the Pascal-based chips the Chinese firms currently have deployed, and the deal is similar to partnerships Nvidia has with U.S. cloud-computing providers.
The takeaway here is worldwide opportunity and to date, worldwide dominance in the area of GPUs.
Larger Than We Think
On January 26, 2018, we penned Nvidia’s Future is Aimed at Magnificence.
In that article, we show Nvidia’s view of the total addressable market in data centers, and the numbers are a little bit… oxygen thieving.
For context, Nvidia did about $10 billion in total company wide revenue in the last twelve months.
Just so don’t somehow forget the other businesses Nvidia is powering, or hope to power, here a few other forecasts from the firm, in other areas:
Gaming, of course, is still the mainstay of Nvidia’s core business, and that too, per the company, is in the early phases of radical growth:
In fact, gaming is the world’s largest entertainment industry with 200 million gamers. Nvidia’s GeForce Now, which is a brilliant cloud-based subscription service for gamers who cannot afford the expense of setting up their own at home rig, has been called a “Netflix for games” by the company.
We can also turn to automotive, and while the self-driving featured portion is one piece, there is an entire ecosystem of smart cars, beyond the driving, that is booming.
And, quietly, Nvidia has named the manufacturing industry, at large, an industry it will revolutionize. That industry’s TAM is… $5 trillion.
With only 10% of manufacturing tasks automated, AI will power a new wave of automation.
And as if we needed more, Nvidia has its sights set on the global transportation segment, a $10 trillion industry.
Now, let’s take a closer look at Nvidia’s cloud business and get to the earnings call because going through these other businesses is just too fantastical to touch until we see actual results.
Nvidia’s Data Center Busines
The push here has come from Nvidia’s newest chip, ‘Volta.’
Equipped with 640 Tensor Cores, Volta delivers over 100 Teraflops per second (TFLOPS) of deep learning performance, over a 5X increase compared to prior generation NVIDIA Pascal™ architecture.
With over 21 billion transistors, Volta is the most powerful GPU architecture the world has ever seen.
Nvidia just reported that its data center business, that is, the usage of its GPUs in data centers grew to $606 million in the last 3 months. Analysts were expecting a lofty $541 million.
In order to put some sort of trend on this business – we’re talking about actual realized revenue, we created our own chart from the company’s public data:
Data from Company Financials
We find it easier to look at trends lumped together as trailing-twelve-months (TTM). Here are those same numbers rolled up into annual tallies:
Data from Company Financials
As of right now, not the future, not a forecast, not a goal – right now, Nvidia’s data center business is just under $2 billion a year, growing at 76% year-over-year. This is a business, right now.
Earnings Call and Results
Let’s take a peek at the earnings call and the highlights we bring forward. We will also intersperse financial charts to draw some context.
* Revenue: $2.91 billion, topping estimates of $2.69 billion.
* EPS: $1.72, excluding the tax benefit, beating estimates of $1.17.
* Net income: $1.12 billion, up from $655 million a year earlier.
* Guidance: Revenue of $2.90 billion, plus or minus 2 percent, well above the analysts’ average estimate of $2.47 billion.
And now the earnings call:
* Q4 revenue reached $2.91 billion, up 34% year-on-year.
* Fiscal 2018 revenue was $9.71 billion, up 41% or $2.8 billion above the previous year.
* Quarterly cash from operations reached record levels at $1.36 billion, bringing our fiscal year total to a record $3.5 billion.
* For the first time, gross margins strongly exceeded 60% (61.9%).
* Outlook for the first quarter, GAAP gross margins are expected to be 62.7%.
* Gaming business revenue was $1.74 billion, up 29% year-on-year [CMl Note: This was more than half of total revenue. Analysts projected $1.59 billion].
* Data center revenue [was] of $606 million was up 105% year-on-year.
* Hyperscale and cloud customers adopting the V100 include Alibaba, Amazon Web Services, Baidu, Google, IBM, Microsoft Azure, Oracle, and Samsung.
* We continue to support the build out of major next generation supercomputers among them that the U.S. Department of Energy’s Summit System expected to be the world’s most powerful supercomputer when it comes online later this year.
* We are also seeing traction for AI in a growing number of vertical industries such as transportation, energy, manufacturing, smart cities, and healthcare.
* There are now more than 320 companies and research institutions using the NVIDIA Drive platform that’s up 50% from a year ago and encompasses virtually every car marker, truck maker, robo-taxi company, mapping company, center manufacture and self-starter in the autonomous vehicle ecosystem.
* We returned $1.25 billion to shareholders in the fiscal year through a combination of quarterly dividends and share repurchases.
Nvidia broke records for revenue, earnings, cash from operations and margins, beating guidance, raising guidance and at the same time noting that the TAM of the various businesses it is pursuing is, in many cases, forecast to grow more than 10x larger in the future.
Gaming, the data center, artificial intelligence, self-driving cars, smart cars, industrial manufacturing, drones, shipping, healthcare, and so many other industries are so clearly headed in a direction of growth for the company that, while the company’s valuation now sits squarely at $140 billion, we still see upside, in the long-term.
The chart we shared above are not just for context, but for an indication of the growth – that is, realized growth. Nvidia is on track to earn more money (net income) than Amazon this year while growing revenue faster than Amazon as well.
We maintain our Spotlight Top status and hold only one company as dear as Nvidia with respect to future growth potential.