ii view: star stock NVIDIA is a real winner during the pandemic

This chipmaker offers exposure to growing data centre sales, but are prospects already priced in?

First-quarter results to 26 April 2020

• Revenue up 39% to $3.08 billion
• Earnings per share up 130% to $1.47
• Paid dividends of $98 million

Founder and chief executive Jensen Huang said:

“NVIDIA had an excellent quarter. The acquisition of Mellanox expands our cloud and data centre opportunity. We raised the bar for AI computing with the launch and shipment of our Ampere GPU. And our digital GTC conference attracted a record number of developers, highlighting the accelerating adoption of NVIDIA GPU computing.”

ii round-up:

Chipmaker NVIDIA (NASDAQ:NVDA) reported record data centre sales in these latest quarterly results.

The company, which competes against the likes of Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD), posted an 80% jump in data centre revenues year-over-year, aided by work from home initiatives under Covid-19 lockdowns. 

Data centre sales of $1.14 billion surpassed the one billion marker for the first time and marginally exceeded analyst estimates. 

NVIDIA shares rose slightly in after hours US trading. Its shares are up by nearly 50% year-to-date having risen over 75% during 2019. 

Sales to both companies enhancing their own IT infrastructure and cloud computing helped fuel the data centre performance. 

NVIDIA recently completed a $6.9 billion acquisition of Israeli chip firm Mellanox Technologies. Mellanox is a supplier of high-performance, end-to-end interconnect solutions for data centre servers and storage systems.

Elsewhere, gaming chip sales rose by 27% to $1.34 billion compared to the first quarter last year. Video gaming and data centre hardware provide its two core business segments.

Including the contribution from Mellanox, overall group second quarter sales are estimated by management to hit $3.65 billion, plus or minus 2%, ahead of analyst forecasts nearer to $3.3 billion. Mellanox is expected to contribute a low-teens percentage of combined Q2 revenue.

Given market uncertainties, management is evaluating the timing of resuming share repurchases. It is currently authorised to repurchase up to $7.24 billion in shares to December 2022 and remains committed to paying a quarterly dividend.    

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. 

Demand for its data centre hardware is currently driving sales. So-called hyperscale customers such as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL), although not named, are thought to be players in fuelling demand. Major organisations, including the US military, now look to outsource their data storage. The growth in conversational Artificial Intelligence, or AI, is also currently playing its part in powering growth. 

While Covid-19 underlines the importance of IT infrastructure, largely to NVIDIA’s benefit, it is also creating pockets of weakness. Management expects sales to automotive customers to fall by 40% during the current second quarter. 

For investors, a share price gain of nearly 50% over 2020 compared to Intel’s 3% and AMD’s 19%, offers some caution against overheating. The importance of China in the wider supplier chain, given current strained US and China relations, also warrants consideration. But these latest results again outline enviable growth, with NVIDIA’s stock market value at around $216 billion still comfortably below that of Intel’s at nearer $260 billion. 

Positives: 

• Exposure to growing data centre demand
• Share repurchase programme of over $7 billion

Negatives:

• Covid-19 uncertainty for some customer sectors
• A price to net asset ratio of 17.8 times, above the three-year average of 14.2 times

The average rating of stock market analysts:

Buy