It would be easy to get discouraged. Despite an overall strong third quarter, NVIDIA (NASDAQ: NVDA) stocks stumbled a bit after the release of its latest earnings report last week. Investors were particularly alarmed by the company’s forecasts of slower revenue growth for data centers, which was NVIDIA’s biggest company a quarter earlier. The stock has continued to decline – albeit modestly – in the meantime.
If you’re concerned about a data center slowdown, don’t worry. Too many investors have lost perspective on the data center issue, overlooking a key detail of NVIDIA’s warning in the process.
The data center explosion is over, for now
For the three-month period ending in October, NVIDIA has revenue of $ 4.73 billion into operating earnings per share of $ 2.91. The former was up 57% year-over-year, and the latter was higher at 63%. Both were significantly increased by the 162% improvement in hardware sales to data centers.
Don’t be too impressed. The company’s acquisition of high-performance IT solutions and services provider Mellanox was completed in April. Its business is accounted for as data center revenue, and that revenue was not in the mix in Q3 2019. The bar was set low. Yet Mellanox only accounted for 13% of last quarter sales and only about a third of third quarter data center revenue. Demand for NVIDIA’s new data center architecture known as Ampere has also been quite strong.
It won’t last, at least according to NVIDIA. CFO Colette Kress said bluntly on the conference call: “We expect the data center to be down slightly [for the current quarter] compared to Q3. “She’s probably right too.
However, the fact that third-quarter data center activity was eerily strong and that Kress’s caution only applied to the current fourth quarter is largely omitted from the phone conversation after the results. The demand for data center hardware is expected to strengthen again during the 2021 schedule.
Think of a bigger picture
The graph below puts it in perspective. Prior to this year, data centers weren’t a big deal for NVIDIA. Most of his sales came from video players and the computer makers who wanted to put NVIDIA’s technology inside their machines distributed to consumers. That started to change in the last quarter of the last calendar year (NVIDIA FY2020) when data center sales started to take off. For the first time ever, in the second quarter, data center revenues exceeded game sales. And game sales weren’t too weak in the second quarter. Video game revenues exceeded data center sales in the third quarter, but NVIDIA’s data center business continued to grow. Now Kress says the growth sequence is likely to be interrupted.
Now look at the graph again. Specifically, notice how the last two quarters are outliers, raising the bar significantly – and perhaps unfairly – for backward comparisons of future quarters.
There is a reason. Aside from the impact of the Mellanox acquisition, NVIDIA’s Ampere architecture for data centers has been all the rage since its release in May. It is particularly well suited to artificial intelligence applications, and some tech giants seem to have waited for such a solution, sinking into it once it has been made available. Microsoft (NASDAQ: MSFT) Vice President Mikhail Parakhin commented at the time on how “Microsoft’s Azure will enable significantly larger AI models to be trained using the next generation of NVIDIA. [Ampere-based] A100 GPUs to push the state of the art in language, speech, vision and multimodality.
However, they will be followed with even more demand.
This is the word of the technology market research team Gartner, anyway, which last month called for a 6.2% increase in global spending on data center infrastructure in 2021. Rival tech market research firm IDC further reported in August that Annual spending on artificial intelligence architecture is expected to double within four years, to $ 110 billion. by 2024. The intersection of these two perspectives could disproportionately benefit NVIDIA. Clearly, the company has been successful in growing this slice of its business despite the 10% drop in data center infrastructure sales this year.
Don’t sweat it
Of course, the company’s fourth quarter data center activity is likely to slow. It should slow down, however.
With or without the logistical and commercial hurdles presented by the resurgence of COVID-19 cases around the world, most data center operators who wanted to upgrade their hardware did so soon after the arrival of Ampere architecture in the market. The pace of this growth in demand was not sustainable, nor will the benefit from the Mellanox acquisition. Mellanox and NVIDIA’s Ampere technology are still largely marketable, however, especially for companies working on artificial intelligence.
Do not lose sight of the forest while examining each tree. NVIDIA is still the same strong company it was a month ago, and its stock is currently trading at a small discount.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.