Nvidia Hits A Grand Slam For Its First Fiscal Quarter

| About: NVIDIA Corporation (NVDA)

Summary

Nvidia reported y/y revenue growth of 13% and operating income growth of 39% for its fiscal 2017 Q1, ended on May 1.

Nvidia has produced an impressive array of new hardware and software products designed to support its platform strategy.

Nvidia's financial and technical performance stands in stark contrast to AMD.

Nvidia (NASDAQ:NVDA) hit a grand slam home run in its earnings report for its fiscal 2017 Q1, ending May 1. The bases were loaded with impressive portfolios of product offerings. On first base, there was Nvidia's portfolio of software for deep learning, Artificial Intelligence, High Performance Computing, and Gaming. On Second base, we had Nvidia's portfolio of professional hardware based on the new Pascal GP100 processor, the Tesla P100 HPC accelerator, the DGX-1 supercomputer in a box, and the Drive PX 2 for autonomous cars. On third base was Nvidia's portfolio of Pascal based graphics cards, the GTX 1080 and 1070. What brought everything home was Nvidia's excellent financial performance, with solid y/y growth and upbeat guidance.

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Source: Nvidia

Strength in Abundance

Nvidia shows what a technology company can achieve when it has both visionary aspirations and the financial strength and profitability to support those aspirations. Strength there was in abundance in the fiscal Q1 results. Revenue was up 13% y/y to $1.305 billion, while GAAP operating income was up 39% y/y to $245 million.

As CEO Jen-Hsun Huang has often reminded us, Nvidia is a platform company, not just a supplier of GPUs to OEMs. The main platform areas are Gaming, Professional Visualization, Datacenter, Automotive, and OEM. Except for OEM, all platforms grew strongly y/y.

Platform

FY 17 Q1 Revenue ($millions)

Y/Y Percent Change

Gaming

687

17.0

Professional Visualization

189

4.4

Datacenter

143

62.5

Automotive

113

46.8

OEM & IP

173

-20.6

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When so many commodity chip firms have responded to the changes in the industry (consolidation, declining sales) by digging in, Nvidia pivoted out of the business. This clearly is working for Nvidia, even as it continues to sell to chips to OEMs.

Guidance for fiscal Q2 was also very encouraging, with a 17% y/y revenue gain to $1.35 billion. Gross margin is also expected to be up to 57.7%, compared to last year's 55%.

Upbeat Conference

In the past few weeks, I've sat through a number of earnings conference calls that were, shall we say... tense. This was the first this season that was positively jovial. Nvidia's management was relaxed and confident, and the analysts were falling all over themselves to congratulate the company on its results.

While the tenor of the call was refreshing, the Q&A was not particularly informative. Nvidia is playing it very close to the chest, and I understand the competitive discipline. But I think Nvidia could have provided investors and analysts with a little more clarity than we got.

For instance, there was a question from Vivek Arya (Bank of America) regarding AMD's claim of taking share in PC gaming. As I discussed in my article on AMD's recent earnings report, it didn't seem to me from the conference call that AMD (NYSE:AMD) was even that certain about its claim of a gain in GPU market share. The GPU market is more than just gaming and add-in cards, but includes any GPU applications, including the datacenter where Nvidia excels.

Unfortunately, Jen-Hsun just wouldn't go into specifics. But let's look at the results. In the Gaming market alone, Nvidia's revenue for the quarter was $687 million, which grew by 17% y/y. This dwarfs AMD's total revenue for the March quarter of the Computing and Graphics segment of $460 million, which was a y/y decline of 13.5%. Under the circumstances, how is it even possible that AMD is taking share from Nvidia in gaming?

I suppose on a unit basis it could be possible, if the ASP is low enough. But when you consider that most of Nvidia's sales are derived from GPUs, the idea that AMD could have grown share for GPUs for all applications becomes simply absurd. In fiscal Q1, Nvidia's revenue from GPUs was $1.08 billion, up 15% y/y. Nvidia's revenue from GPUs alone is greater than AMD's total revenue for the quarter of $832 million. It's obvious that Nvidia is growing GPU share when all applications are considered.

Jen-Hsun was asked about yields on Pascal, and while he wouldn't go into specifics, he did say that yields at TSMC (NYSE:TSM) are very good. He pointed out that it's been a year since TSMC started the 16 nm FinFET production ramp, so normal learning curve supports his statement. I doubt there'll be any problem supplying the markets served by the new Pascal GPUs.

It would also have been nice to get a little more visibility into future Pascal product plans. Jen-Hsun did say that all the Pascal chips have been tapped-out. He wouldn't go into specifics as to when more chips would be rolled out. He was asked if a GPU refresh (and this is probably more for mobile applications) would be completed in fiscal 2017. Huang wouldn't give a definite answer.

I think it's likely that we'll see Pascal mobile chips this calendar year, with another set of extreme gaming graphics cards based on the GP100 available early in calendar 2018.

Investor Takeaway

This was one of those rare earnings reports where there was virtually no bad news. Nvidia is producing new products and getting them into the hands of customers. Nvidia's status stands in stark contrast to AMD. Nvidia is generating profits. AMD is not. Nvidia is growing revenue and earnings. AMD is not. Nvidia is delivering on its promised new products. AMD has yet to do so.

The market hasn't reacted quite hysterically to Nvidia's earnings report (shares only up 13% as of this writing) as it did to AMD, but I think the gains will prove more durable. I remain long Nvidia and recommend it as a buy.

Disclosure: I am/we are long NVDA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.