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Technology Stocks : Investing in Exponential Growth

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From: Paul H. Christiansen2/13/2018 4:17:27 PM
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Just How Large Can Nvidia’s Datacenter Business Grow?

The combination of the excitement for new video games, the machine learning software revolution, the buildout of very large supercomputers based on hybrid CPU-GPU architectures, and the mining of cryptocurrencies like Bitcoin and Ethereum have combined into a quadruple whammy that is driving Nvidia to new heights for revenues, profits, and market capitalization. And thus it is no surprise Nvidia is one of the few companies that is bucking the trend in a very tough couple of weeks on Wall Street.

But having demand spiking for both its current “Volta” GPUs, which are currently aimed at HPC and AI compute, and its prior “Pascal” GPUs, which target gaming, workstations, and cryptocurrency mining, is both a blessing and a curse that also turns out to be a blessing as well, at least financially and at least in the short term as demand is exceeding supply.

Transforming Nvidia from a company that supplies graphics processors focused on a relatively small corps of elite gamers to one that provides a wide range of compute and graphics across disparate markets that can equally benefit from the common engineering in its products has taken a long time. But it certainly has paid off. And in the short term, as cryptocurrency miners are chasing the same GPU cards as gamers, and as machine learning trickles down from the hyper-scalers to service providers and enterprises of all sorts and requires the same Tesla accelerators that are used for virtual workstations on public clouds, this is all creating a virtuous demand cycle that is expanding the market.

In the quarter ended in January, Nvidia’s revenues rose 34 percent to $2.91 billion. Gross margins were up, we believe due to product mix and huge demands for products, allowing Nvidia to charge a premium price, and the bottom line was helped, too, by a $133 million tax benefit in the wake of the tax overhaul in the United States by the Trump administration. As a result of these factors, Nvidia’s net income rose by 70.7 percent to $1.12 billion. Nvidia just paid off $355 million for its new headquarters in Santa Clara, and Colette Krauss, chief financial officer at the company, suggested in a call with Wall Street analysts going over the fourth quarter fiscal 2018 results for Nvidia that the chip maker might invest more heavily in its own supercomputer infrastructure to bolster its AI research and chip designs. (It already has plans for a 660 node hybrid CPU-GPU cluster, the next generation Saturn V cluster.) Nvidia ended the quarter with $7.1 billion in cash and investments and a modest $2 billion in debt. Krauss said that Nvidia expected sales of $2.9 billion in its first quarter of fiscal 2019, which ends in April, plus or minus two percent and more or less matching the quarter it just finished.

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