ii view: hot tech stock Nvidia reports record revenue

Exposure to gaming, data centres and cryptocurrency mining. It plans to buy ARM too. Buy, sell or hold?

First-quarter results to 2 May

• Revenue up 84% to $5.66 billion
• Earnings per share up 103% to $3.66
• Cash dividend of $0.16 per share

Founder and chief executive Jensen Huang said:

“We had a fantastic quarter, with strong demand for our products driving record revenue. Our Data Centre business continues to expand, as the world’s industries take up Nvidia AI to process computer vision, conversational AI, natural language understanding and recommender systems. 

“Nvidia RTX has reinvented computer graphics and is driving upgrades across the gaming and design markets. Our partners are launching the largest-ever wave of Nvidia-powered laptops. Across industries, the adoption of Nvidia computing platforms is accelerating.” 

ii round-up:

US computer chip maker Nvidia Corp (NASDAQ:NVDA) reported record revenue in these latest quarterly results, pushed higher by growing demand and a shortage of semiconductors globally.

Sales of its gaming chips doubled to $2.76 billion year-over-year and data centre specific chips grew by nearly 80% to $2.05 billion. Sales of chips designed specifically for cryptocurrency miners came in at $155 million and are expected to grow to $400 million during the current second quarter. 

Nvidia shares were little changed in trading following the results, having gained over 185% since the pandemic market crash of March 2020. Nvida’s stock market value of over $385 billion now towers above its better know rival Intel (NASDAQ:INTC) at under $240 billion.   

In September 2020, Nvidia agreed to buy UK-based chip designer ARM Holdings from Japanese company SoftBank. The UK government is now examining the deal on national security grounds.

ARM is the creator of the world’s most popular CPU chips. Nvidia believes that bringing it and ARM together creates a company fabulously positioned for the age of AI, or Artificial Intelligence. The deal, if successful, is not expected to complete until early 2022.

The proposed acquisition of ARM follows Nvidia’s previous purchase of Israeli chip firm Mellanox Technologies. Mellanox supplies high-performance solutions for data centre servers and storage systems and has added to its stellar performance across the growing data centre arena.

Sales of its automotive designed chips fell 1% year-over-year to $154 million although rose 6% from the previous quarter. Nvidia recently unveiled its Atlan AI-enabled chip designed for autonomous vehicles. Both Tesla (NASDAQ:TSLA) and Waymo, a subsidiary of Google-owner Alphabet (NASDAQ:GOOGL), have been working on autonomous vehicle design. 

Revenue for Nvidia’s current second quarter is forecast by management to come in at around $6.3 billion. That would make for a rise of just over 60% from the second quarter last year. Nvidia recently announced plans for a four-for-one stock split pending shareholder approval.

ii view:

Nvidia describes its chip products as being the computer brain at the intersection of virtual reality, high performance computing and artificial intelligence. Its chip computing abilities are touching on areas from gaming, cloud computing, AI and robotics to self-driving cars, genomics and computational biology. 

The potential joining of a major player in the gaming and data centre arena, with a key force in the mobile phone chip world, would be seismic. The planned purchase of ARM is expected by Nvidia management to accelerate innovation and growth at ARM. 

For investors, a gain of more than 80% in the share price over the last year injects some caution. A current estimated forward price/earnings (PE) ratio in the mid-40s compared to ratios of under 30 at rivals such as Intel, Broadcom (NASDAQ:AVGO) and Texas Instruments (NASDAQ:TXN) may suggest better value elsewhere.  

However, potential like this doe snot come cheap, and growing demand for its products and expanding arenas for their use cannot be ignored. A hoped-for coming together with ARM adds to growth prospects, while the planned share split will likely leave more retail investors taking an interest. For now, this hot tech stock remains one to watch. 

Positives: 

• Exposure to growth in gaming and data centres
• A potential purchase of ARM

Negatives:

• US and China tensions
• A price to net asset ratio of 22.7 times, above the three-year average of 14.1 times

The average rating of stock market analysts:

Buy