ii view: How artificial intelligence is driving Nvidia

Nvidia offers exposure to exciting areas of growth, but are prospects already priced in?

Third-quarter results to 27 October 2019

• Revenue down 5% to $3.01 billion
• Net income down 4% to $1.1 billion
• Earnings per share down 3% to $1.78

Founder and chief executive Jensen Huang said:

"Our gaming business and demand from hyperscale customers powered Q3's results. The realism of computer graphics is taking a giant leap forward with NVIDIA RTX. 

"This quarter, we have laid the foundation for where AI [artificial intelligence] will ultimately make the greatest impact. We extended our reach beyond the cloud, to the edge, where GPU-accelerated 5G, AI and IoT will revolutionize the world's largest industries. We see strong data centre growth ahead, driven by the rise of conversational AI and inference."

ii round-up:

Founded in 1993, NVIDIA (NASDAQ:NVDA) designs computer graphic chips. 

Video gaming and data centre hardware provide its two core business segments. It also operates the two smaller divisions of Professional Visualization and Edge Computing. 

The chipmaker, whose products have most recently been used to power high performance computing and artificial intelligence, reported mixed third-quarter results. Both sales and earnings exceeded analysts' forecasts, while fourth-quarter guidance proved marginally short of estimates.  

Gaming sales fell by 6% due to lower sales of its GeForce® desktop GPUs. Data Centre revenue retreated by 8% year-over-year, although rose by 11% compared to the second quarter thanks to increased demand for products used in large or hyperscale data centres. 

Earlier in the year, NVIDIA agreed to buy Mellanox Technologies for approximately $6.9 billion. Mellanox is a supplier of high-performance, end-to-end interconnect solutions for data centre servers and storage systems. 

Management's guidance for the fourth quarter pointed to revenue of around $2.95 billion, an increase of over 30% on last year, but analysts had been looking for a figure of over $3 billion. 

The share price found little direction in after-hours US market trading. 

ii view:

NVIDIA describes the Graphics Processing Unit (GPU) as now being the computer brain at the intersection of virtual reality, high performance computing and artificial intelligence. 

Growth prospects for artificial intelligence and high-performance computing, we believe, look enticing. But the exact company winners in these arenas are far from certain. Rival chip maker Advanced Micro Devices (NASDAQ:AMD) is competing hard to keep its name in the frame, while companies attempting to garner growth but taking different angles such as Alphabet (NASDAQ:GOOGL) also need to be considered. 

For investors, a forward price/earnings (PE) ratio of around 40, marginally below the three-year average, needs to be weighed against revenue and earnings projections currently pointing lower and a 50% plus rise in the share price year-to-date. 

Positives: 

• Exposure to potential growth areas such as artificial intelligence
• Cash at the end of the third quarter of $9.77 billion

Negatives:

• Revenue has now declined four quarters in a row on an annualized basis
• Expects fourth-quarter seasonal weakness for gaming cards used in PCs and laptops

The average rating of stock market analysts:

Buy