ii view: Nvidia generates record gaming and data centre sales

Triple-digit data centre growth and a deal on the table to buy ARM. Can investors ignore this chip maker?

Third-quarter results to 30 September

• Revenue up 57% to $4.73 billion
• Earnings per share up 63% to $2.91
• Paid dividends of $99 million

Founder and chief executive Jensen Huang said:

“Nvidia is firing on all cylinders, achieving record revenues in gaming, data Centre and overall. The new Nvidia GeForce RTX GPU provides our largest-ever generational leap and demand is overwhelming. Nvidia RTX has made ray tracing the new standard in gaming.

“We are positioning Nvidia for the age of AI, when computing will extend from the cloud to trillions of devices.”

ii round-up:

US computer chip maker Nvidia (NASDAQ:NVDA) announced record revenue in these latest quarterly results, driven by exposure to both gaming and data centres, as populations globally both played and worked from home during the Covid-19 pandemic. 

Data centre related sales spiked by 162% from this time last year to $1.9 billion. Gaming chip sales rose by 37% year-over-year to $2.27 billion.

Nvidia shares are up 128% year-to-date. Xbox gaming console maker Microsoft (NASDAQ:MSFT) shares are up by just over a third in 2020.

Nvidia recently launched a new line of graphics cards based on a new technology it calls Ampe, with demand proving strong. Its previous purchase of Israeli chip firm Mellanox Technologies added to the stellar performance of its data centre business. Mellanox supplies high-performance, end-to-end interconnect solutions for data centre servers and storage systems. 

In mid-September, Nvidia agreed to buy UK chip designer ARM Holdings from Japan's SoftBank. The deal is awaiting clearance by various national regulators. ARM is the creator of the world’s most popular CPU chips. 

Nvidia believes that bringing the two 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. If/when it happens, Nvida plans to build a world-class AI lab in Cambridge, England ― including a powerful AI supercomputer based on Nvidia and Arm technology.

ARM designs and licenses its chip architectures to makers such as Qualcomm (NASDAQ:QCOM), whose product is used in both Apple (NASDAQ:AAPL) and Alphabet Google (NASDAQ:GOOGL) android software mobile phones across the globe. 

Nvidia guidance for the current fourth-quarter pointed to lower data centre revenues than just achieved, given a Chinese customer’s desire to not use Mellanox products. Nvidia shares drifted marginally lower in post results US trading. 

ii view:

Nvidia describes its chip products as being the computer brain at the intersection of virtual reality, high performance computing and artificial intelligence. 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. Apple previously announced plans to switch its Mac computers from Intel chips to an ARM-based design. The Covid-19 pandemic also continues to underline the importance of IT infrastructure to corporations across the world. 

For investors, the strong share price performance of Nvidia shares in 2020, compared to more sedate gains for rivals, arguably generates some caution. A doubling for Nvidia compares to gains in the region of 20% for Broadcom (NASDAQ:AVGO) and Texas Instruments (NASDAQ:TXN). An estimated price/earnings (PE) ratio in the 50s is comfortably ahead of Intel's (NASDAQ:INTC) at around 10 times and Qualcomm’s at closer to 20. But growing datacentre demand, the growth potential for AI and now the added potential combination with ARM, all make Nvidia a very popular share. 

Positives: 

• Exposure to growth in gaming and data centres
• Targeting growth in AI

Negatives:

• US and China tensions
• A price to net asset ratio of 27.2 times, above the 3-year average of 14.2 times

The average rating of stock market analysts:

Buy