by Cygopat
Historically, NVIDIA has been a hardware gaming company. This is still the impression most people have even nowadays when they think of NVDA. NVDA has been fighting this image, claiming that they’re just as much a software company or an AI company. If you’ve been paying any attention then you’ll have noticed that this is true. But what would “officially” make them primarily an “AI” company? By making more money from data center than from gaming. Of course this is a generalization, they’re nowadays already implementing AI in their gaming GPUs (DLSS 2.0, RTX voice), but details don’t make headlines.
The big growth stories for NVDA have been data center and self driving cars. Surely also their gaming revenue can be expected to grow but it’s not what has been driving NVDA’s high PE. Self driving cars haven’t taken off yet, they’re even expected to decline due to covid, but the story is intact and NVDA has been making progress and partnerships.
Data center meanwhile is already now turning into a gold mine for NVDA and it has been a big part of the stock’s valuation. Expect the stock price to take a decent hit if their revenue from data center doesn’t meet expectations in their next ER (8/19). On the other hand, a beat could push the stock price past $500, especially if data center revenue exceeds gaming revenue. Obviously this doesn’t technically matter, it’s just one number passing the other which may have been priced in, but that’s not how these stonks work. NVDA’s valuation is based on a story and not on numbers and if they’re starting to make more money from data center than from gaming we’re certainly entering the next chapter of that story.
So how could we get there? Let’s look first look at their first quarter of fiscal 2017 (2016 year). This was when they first started disclosing revenue from data center.
- Gaming $687M
- Data Center $143M
At this point in time their revenue from gaming exceeded revenue from data center 5 fold. 4 years later these are their revenue numbers for the first quarter of fiscal 2021 (2020 year):
- Gaming $1,339M
- Data Center $1,141M
So within 4 years their revenue from data center increased 8 fold. We’re almost quite there! Now what could push revenue from data center above gaming revenue?
According to their 10-Q for the last quarter, the A100 (data center GPU) is in full production, it’s fastest ramp in history and already contributed to Q1 revenue. This despite the report being released just one week after the release of the A100. NVDA claims that the A100 is up to 20x faster vs. the V100 and that this is the biggest generational performance leap ever. So we have a yuge new product here and this is the first quarter in which they’re pumping it into the market at full steam.
Meanwhile this is the last quarter for their RTX 2000 series for gaming. They’ve already stopped the production of these cards and the new cards are going to be announced in 2 weeks. Covid has certainly helped drive demand for gaming gpus and NVDA seems to be doing just fine with clearing their inventory, but apart from people holding back with buying due to waiting for the 3000 series, summer historically isn’t a strong quarter for gaming because people spend more time outside.
Now onto the actual reason why data center revenue will increase even further. The Mellanox acquisition closed on April 27 and starting with Q2 FY2021, data center will incorporate Mellanox revenue. Mellanox revenue last quarter was $429M. So had Mellanox revenue been included in their last quarter’s ER, data center revenue would already have exceeded gaming revenue.
What does this mean for NVDA’s ER in 5 days? Data center revenue should range from $1.5B to $2B. Anything below $1.5B would certainly be a disappointment considering that it will include the revenue of Mellanox. Of course that’s kind of baked in but I’m fully expecting the biggest beat NVDA has had in years, confirming the story the stock is trading on and sending it past $500.
tl;dr:
- leather jacket man says data center is now a $100B market and will be a $1T market in a few years
- leather jacket man is trying to play a big role in that market
- leather jacket man is delivering on that promise
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.