Nvidia's Data Center Segment Is Generating Meaningful Upside

Summary

• Nvidia Corp reported a great first-quarter fiscal 2021 earnings report.
• In this article, we highlight the ongoing strength of its growing 'Data Center' segment.
• Nvidia's growth outlook remains bright.
• Longer term, Nvidia's 'Automotive' segment reinforces its promising growth outlook.

Image Source: Nvidia Corporation - First Quarter Fiscal 2021 Earnings IR Presentation

By Callum Turcan

We are following up on our last Seeking Alpha article (link here) covering Nvidia Corporation (NASDAQ:NVDA) to bring attention to its latest earnings report and its strong growth outlook. Nvidia has performed exceptionally well during these challenging times as the world awaits a potential cure or vaccine for the coronavirus ('COVID-19').

Quarterly Update

On May 21, Nvidia reported its first quarter fiscal 2021 earnings (period ended April 26, 2020) and its 'Data Center' segment really stood out. Revenue at this segment came in above $1.1 billion in the fiscal quarter, up 18% sequentially and 80% year-over-year. Demand for data centers has apparently held up quite well during the pandemic as more employees work from home and due to stay-at-home orders driving up usage of data-hungry video streaming and telecommunications services. Nvidia's other large segment in terms of sales, 'Gaming,' saw its revenues decline sequentially but were still up a nice 27% year-over-year.

Overall, Nvidia's GAAP revenues were up 39% year-over-year last fiscal quarter hitting $3.1 billion and that helped more than double its GAAP diluted EPS, which came in at $1.47. Nvidia's GAAP operating income almost tripled year-over-year, hitting $1.0 billion last fiscal quarter, as growth in its operating expenses were modest compared to the surge in its top-line.

Image Shown: Nvidia's data center segment really outperformed last fiscal quarter. Image Source: Nvidia - First Quarter Fiscal 2021 Earnings IR Presentation

Please note that a day after the fiscal quarter ended, Nvidia completed its acquisition of Mellanox through an all-cash transaction valued at ~$7.0 billion. As of April 26, 2020, Nvidia had $16.4 billion in cash, cash equivalents, and marketable securities on hand versus no short-term debt and $7.0 billion in long-term debt. The company should be in a position to retain its net cash balance once it reports fiscal second quarter earnings in large part due to its high quality cash flow profile, relatively small dividend obligations (~$0.1 billion last fiscal quarter), and due to the company not repurchasing a significant amount of its stock in recent fiscal quarters (an intentional maneuver). Here's what management had to say about the acquisition during Nvidia's latest quarterly conference call:

…let me make a few comments on our Mellanox acquisition… Mellanox has exceptionally strong financial profile. The company reported revenue of $429 million in its March quarter, accelerating to 40% year-on-year growth, with GAAP and non-GAAP gross margins in the mid- to high 60% range. We expect the acquisition to be immediately accretive to non-GAAP gross margins, non-GAAP earnings per share and free cash flow. We aim to retain the full Mellanox team and accelerate investments in our combined road map as we jointly innovate on our shared vision for the future of accelerated computing.

Promising Growth Outlook

With the fiscal first quarter now in the rearview mirror, let us look ahead to the future. On May 14, the chipmaker announced it was launching NVIDIA Jarvis which was billed as "a GPU-accelerated application framework that allows companies to use video and speech data to build state-of-the-art conversational AI services customized for their own industry, products and customers" to enhance its data center offerings. Specifically, NVIDIA Jarvis is targeted towards automating customer support and service operations (chatbots, consumer-generated transcripts of phone calls, summarizations of video calls, and more) using an end-to-end deep learning pipeline for conversational AI.

Additionally, Nvidia also announced on May 14 that it was launching NVIDIA DGX A100 which was billed as "the universal system for all AI infrastructure, from analytics to training to inference. It sets a new bar for compute density, packing 5 petaFLOPS of AI performance into a 6U form factor, replacing legacy infrastructure silos with one platform for every AI workload" and furthermore "NVIDA DGX A100 is the world's first AI system built on the NVIDIA A100 Tensor Core GPU" which helps set the stage of Nvidia's push deeper in the realm of data centers and AI.

Finally, Nvidia also announced the rollout of its first GPU built on its new NVIDIA Ampere architecture on May 14, the NVIDIA A100. The new GPU "is in full production and shipping to customers worldwide" which should provide a nice uplift to Nvidia's near-term financial performance.

These maneuvers should help solidify Nvidia's existing position in the data center and AI space, and underpin our growth forecasts for the firm. As you can see in the upcoming graphic down below, we forecast Nvidia will aggressively grow its top-line over the next several fiscal years (these forecasts were generated through our enterprise cash flow model). Please note the grey line represents our base case scenario, while the green dots and blue dots represent our bear and bull cases, respectively. To learn more about enterprise valuation, please read the book Value Trap: Theory of Universal Valuation.

Image Shown: Nvidia's strength in the data center space underpins our top-line growth forecasts for the company over the coming fiscal years. Image Source: Valuentum

Nvidia presented at the Needham Automotive Tech Day Conference in early-June and provided some key commentary on its various businesses. As an aside, Nvidia's 'Automotive' segment saw its revenues decline by 7% year-over-year last fiscal quarter due to pressures facing automotive sales in the US and the world. However, the rise of semi-autonomous (from assisted parking and limited assisted driving services) and potentially fully-autonomous automobiles over the coming years and decades paints a promising long-term outlook for the segment. Vehicles are increasingly becoming equipped with a growing amount of computing power, supporting Nvidia's growth ambitions in the space. Here's what Nvidia's management had to say during the recent Needham conference:

So, NVIDIA of course started out as a gaming company, and that's still a very big part of what we do and there's great growth there. But, as you know, AI is transforming every industry and NVIDIA is sort of at the heart of that AI revolution. There is really two aspects to AI. There is first, the development of the AI, the training, and we play a very active role in that, and our data center business is innovating in that space. And we just had new announcements with our new Ampere architecture, and data center growth is enormous. But then, there's also the aspect of what we call edge AI or also inference where sensors are taking data in and the AI has to understand the environment. And it's a continual cycle of reasoning and acting and planning.

In the automotive space, we have solutions that are designed to enable autonomous vehicles, and creating the brain of an AI system. And so, our DGX systems are used in the data center and its exact same architecture than that goes in the vehicle in a platform specific on what we call NVIDIA DRIVE AGX, our autonomous processing platform for vehicles and robots and even healthcare. And so, again, we have a full end-to-end system that we've developed to enable everything to ultimately be autonomous. We believe this will be the case. Varying levels of automation and autonomy will be across cars and trucks and all kinds of robots and delivery vehicles and fast transportation as well as specialty vehicles, so agriculture and mining as well.

Over time, Nvidia's automotive segment and sales should become a bigger part of the company. Additionally, the potential for Nvidia to expand into the automated agriculture and mining specialty equipment space (as mentioned during the conference) is intriguing, though we are still in the very early innings in this space.

Concluding Thoughts

Nvidia's financials are strong and its growth outlook is bright, assisted by the rollout of new data center and AI offerings. The recent run up in shares of NVDA are in large part due to the firm's ongoing success in this space, in our view. Longer term, we are excited to see how Nvidia's automotive sales hold up once the economy begins to emerge from the COVID-19 induced economic downturn.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice.