This Just Happened for the First Time in Nvidia’s History

For the first time in its history, a manufacturer of graphics processing units (GPUs). Nvidia (NVDA 0.35%) it generated higher quarterly revenue in its data center segment than in its gaming division. While some investors may not really understand the meaning, I think this is a huge step for the company. This flip shows Nvidia’s resilience in facing several volatile markets.

Once just a company focused on improving gaming graphics, Nvidia has expanded its product offering to multiple other areas. It now divides its business into four divisions: gaming, data center, professional visualization, and automotive and robotics. That said, are Nvidia shares a buy now?

Image source: Getty Images.

The strong growth of the data center division is driving the future of Nvidia

Invented in 1999 by Nvidia to enable real-time programmable shading, the GPU remains the company’s main offering. However, current GPUs are a long way from their ancestors. Today, GPUs enable cloud computing, run engineering simulations, extract cryptocurrencies, and power autonomous vehicles.

Overall, Nvidia’s latest quarterly results (first quarter of 2023, ending May 1) were solid. Revenue increased 46% year-over-year to $ 8.3 billion, while net non-GAAP revenue increased 49%. Although Nvidia is profitable in terms of GAAP (generally accepted accounting principles), there has been a charge of $ 1.35 billion since the proposal was finalized. Arm acquisition, which adversely affected GAAP earnings.

The data center division was the strongest, with a massive 83% year-over-year increase in revenue to $ 3.8 billion. The game still grew a respectable 31% year-over-year, but gave up its biggest segment crown with $ 3.6 billion in revenue.

Why is data center revenue growth significant?

Data centers use GPUs to speed up workloads, aiding artificial intelligence (AI) and machine learning. Specifically, Nvidia’s data center products are best-in-class and power infrastructure, such as the DHX H100 Enterprise Artificial Intelligence Infrastructure, which is expected to be the fastest artificial intelligence system in the world when online. at the end of 2022.

The move to the cloud and harnessing the power of AI is just beginning, giving Nvidia a huge market opportunity.

Are games doomed?

Now that the revenue from the data center has surpassed that of the games, a crown that the latter may not recover soon, does that mean that the games are a shadow?

Although GPUs are still used to power gaming computers, they are also used to undermine cryptocurrencies. Nvidia continues to produce the most powerful GPUs in this market, as gamers and miners are always looking for an edge over competitors. Therefore, players will always be on the lookout for the latest and greatest.

However, if cryptocurrency prices continue to fall, the demand for GPUs used to mine cryptocurrencies is likely to follow suit.

Cryptocurrency mining warehouse.

Image source: Getty Images.

This drop is precisely what happened in 2019 when cryptocurrencies fell and GPU demand fell off a cliff. Nvidia tried to address this in its first-quarter quarterly conference call by informing investors that “the extent to which cryptocurrency mining has contributed to gaming demand is difficult for us to quantify with any reasonable degree of accuracy.” Because the GPUs used for gaming and mining are identical, it is not possible to break the revenue of the gaming division.

Even with the fall in cryptocurrency prices, the hash rate (which measures how many computer resources are used to process transactions in a working test cryptocurrency) for the two most popular cryptocurrencies is just below their highs. As miners continually set new highs in computing power, more GPUs are being sold to power the network, contributing to Nvidia’s gaming center revenue.

Chart showing Bitcoin and Ethereum hash rates on the rise since mid-2021.

Data by YCharts.

In short, the gaming segment does not appear to be affected by the cryptocurrency market.

However, Ethereum will switch to a participation proof model later in 2022, meaning that the cryptocurrency will no longer be mined. This change could adversely affect Nvidia’s gaming division due to declining GPU demand.

Regardless, Nvidia’s management felt confident enough in the business to announce a $ 15 billion share buyback program. This plan would reduce outstanding shares by 3%.

Nvidia’s management sees revenue growth of 25%, including a $ 500 million effect for the second quarter caused by China’s blockades and Russia’s war on Ukraine. While this marks a considerable slowdown, it is still a respectable growth given the size of Nvidia.

Negotiating around 50 times the profits and dropping more than 40% from its all-time high, Nvidia is a big buy here. This price represents an excellent opportunity for value investors to take advantage of one of the greatest growth opportunities available, cloud computing. Also, while cryptocurrency mining is a wildcard, Nvidia is better prepared for a recession than in 2019.

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