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The company’s new Ampere chip design is being adopted by the likes of Amazon, Google and Microsoft for their cloud operations.
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As much as Nvidia wants investors to think of it as a data center company, in some ways that transformation remains incomplete.
With Wednesday’s earnings report, Nvidia crossed an important threshold. For the first time, the data center company generated more revenue than its gaming company – albeit with a 30% boost from the purchase of Mellanox, an Israeli network company it acquired. Founder and CEO Jensen Huang spoke passionately at the conference meeting on data center computing as the future of the company and the specific ways Nvidia (ticker: NVDA) was indexed to the broad trends in mass computing he predicts.
But the range of analyst comments to revenue describes a company that remains firmly tied to its roots as a video game maker for graphics chips. It was the revenue from the company’s video games that significantly exceeded expectations, in part because of the pandemic, according to several analysts’ notes released Thursday. And expectations are that revenue from video games will rise even higher in the third quarter.
The strong video game results of the last four years struck Susquehanna Financial Group analyst Christopher Rolland as a bit strange. After all, the company is set to introduce its next-generation graphics processing units for games in less than two weeks. So why buy a new graphics card now?
Potentially, he wrote, that is a sign of good things to come, but if Barron’s has previously written, Nvidia’s new chips have proved a besieged beast for investors, not always indicative of a next quarter of strong revenue growth.
However, video games were the star of the show, according to Rolland, potential investors to ask them about what is coming to data centers. “While gaming on the rise was clearly the star of the show, datacenters were more in line with the Street and may disappoint the most Bullish of investors,” he wrote.
However, there were positive points on the data center business for investors to note, although CFO Colette Kress said the company expects sales will only increase in the low to mid-range figures for the fiscal third quarter.
For one, the new Ampere chip design is being adopted by the likes of Amazon.com (AMZN), Google’s Alphabet (GOOGL), and Microsoft (MSFT) for their cloud operations. For another, Mellanox, which makes high-speed network equipment and bought Nvidia for $ 6.9 billion, grew above expectations, contributing $ 540 million to $ 1.75 billion from data centers.
Citi Research analyst Atif Malik wrote that the results of Nvidia’s view of data centers did not change. His team is modeling another 10% peak after trough decline in the second half of the year due to demand for work-from-home, compared to a 20% drop in the first half of 2019. “We believe diversification of labor tax and new Ampere product bicycle aid cherished the decline this time, ”Malik wrote.
For investors, the results have not sparked several debates about the stock, according to RBC Capital Markets analyst Mitch Steves. On Thursday, after opening lower, the stock reversed the price and was up 0.8% to $ 489.59 in midday trading.
In a note to clients, Steves wrote that one aspect of the debate continues to revolve around whether demand for data centers remains strong and when the company will begin to see more revenue related to autonomous driving, which of late is slow.
Then there is the issue of appreciation. Nvidia is the third-most expensive stock in the PHLX Semiconductor index, trading at 49.5 advances. As Steves wrote, investors are still asking, “What is the right multiple to place on the stock market, considering its market-leading position offset by lower visibility in demand at Data Center?”
Of the 42 sales site analysts who handle Nvidia, 34 value a Buy, six have a Hold and two put a Sell on the forefront. The average target price is $ 506.65, which implies a 3.5% upside.
Shares of Nvidia have more than doubled this year, with the S&P 500 index gaining 5.8%. The PHLX has risen 18%.
Write to Max A. Cherney at [email protected]
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