NVIDIA Continues Its Bull Run of Form Posting Strong Q3

The News: Nvidia Corp. shares were indicated modestly higher in pre-market trading Friday after the gaming chipmaker forecast lighter-than-expected near-term revenues that offset a solid third quarter earnings report.

Nvidia said non-GAAP earnings for the three months ending on October 27, the group’s fiscal third quarter, came in at $1.78 per share, down 3.3% from the same period last year but firmly ahead of the Street consensus forecast of $1.58 per share. Group revenues, Nvidia said, fell 5.5% from last year to $3.014 billion, just ahead of analysts’ forecasts of a $2.92 billion tally.

Looking into the final months of its 2020 fiscal year, Nivida said it sees fourth quarter revenues in the region of $2.95 billion, with a margin for error of 2%, and an improving non-GAAP gross margin of 64.5%, with a 50 basis point error margin. Data center chips, Nvidia said, are likely to be the key growth driver as demand for gaming hits a traditional seasonal decline. Read the full news item on The Street.

Analyst Take: NVIDIA, overall had another strong quarter driven by strong growth in its gaming category.  This is particularly true on a sequential basis as revenue and earnings were up 17% and 61% respectively. On a year over year basis, the numbers were a bit less impressive as revenue and Non GAAP earnings were down slightly. 

But Those Margins

One area that NVIDIA could really lean into for this quarter was its continued growth in its margins. This quarter its margins climbed over 400 basis points to over 64.1% and the company going forward is estimating that those margins will rise further to 64.5%. The margin growth is said to be mostly attributed to the product mix, but I see this as an obvious positive.

Breaking Down the Business

NVIDIA focuses on 4 main business categories that include Gaming, Data Center, Pro Viz and Automotive. 

For this quarter, the strength was in Gaming, but Pro Viz also turned up with sequential growth. Data Center and Automotive both showed year over year declines but on a positive note Data Center delivered sequential growth for the quarter. 

The company had a number of important launches and releases during the quarter as well with the most significant coming out of gaming and data center, but also a noteworthy win in Edge Compute. 

Gaming

  • Announced with Microsoft that Minecraft, the world’s most popular computer game, will feature ray tracing.
  • Announced SUPER versions of GeForce GTX TM GPUs with GeForce GTX 1650 SUPER, and GeForce GTX 1660 SUPER, successor to GeForce GTX 1060, the world’s best-selling GPU.
  • Introduced the RTX Broadcast Engine, which uses the AI capabilities of GeForce RTX GPUs to enable virtual greenscreens, filters and AR effects in livestreaming.
  • Announced two new models of the SHIELD TV streaming media player, which bring unmatched levels of home entertainment, gaming and AI capabilities to the living room.
  • Expanded the reach of GeForce NOW TM game streaming, with the service announced by Taiwan Mobile and Russia’s Rostelcom with GFN.ru, which joined Korea’s LG U+ and Japan’s SoftBank.

Data Center

  • Launched the NVIDIA® EGX Intelligent Edge Computing Platform to bring accelerated AI to retail, manufacturing, telecommunications, logistics and other industries, with Walmart, BMW, NTT East, Procter & Gamble and Samsung Electronics among early adopters.
  • Collaborated with Microsoft to provide an optimized hybrid-cloud platform combining Microsoft Azure software with NVIDIA EGX powered by NVIDIA T4 GPUs to address edge-computing demand.
  • Entered the 5G telecom market, enabling telcos to build high-performing, efficient, virtualized 5G radio access networks using GPUs, in collaboration with Ericsson.
  • Announced a collaboration with Red Hat to deliver software-defined 5G RAN using Red Hat OpenShift and GPU-accelerated servers.  
  • Won the first inference benchmark, MLPerf Inference 0.5, measuring AI workload performance in data centers and at the edge.
  • Partnered with VMware to accelerate VMware Cloud on AWS using NVIDIA T4 GPUs and introduced the new NVIDIA vComputeServer software for enterprises to run AI workloads on GPU servers in virtualized environments.
  • Announced that the United States Postal Service will use NVIDIA AI technology to improve its package data-processing efficiency.

Edge Computing

  • Introduced Jetson Xavier™ NX, the world’s smallest, most powerful AI supercomputer for robotic and embedded computing devices at the edge.        

The collective collaboration, partnership and product/service launches across the quarter show continuous focus on winning market share and delivering category leading solutions. This quarter the company also made some interesting partnerships like the one it launched with Ericsson and with Red Hat to put a stake in the ground around 5G. I’m also watching closely how NVIDIA partners with public cloud providers like AWS and Azure to deliver elastic inference services as I believe this will become a highly utilized vehicle for enterprise AI. 

What Lies Ahead for the Next Quarter?

NVIDIA put forth guidance of $2.95 Billion (+/- 2%) for the fiscal 4th quarter, which sits below the consensus $3.07 Billion. This can be attributed to seasonality, especially with the gaming segment. I am sensing a wave of conservatism from recent earnings calls and NVIDIA seems to be fitting that mold. With seasonality a known factor for NVIDIA, it isn’t surprising to see the guidance a bit lower. I also think the China US landscape is impacting numbers as uncertainty continues to loom with no end in sight to the trade conflict. 

Overall Thoughts

I remain bullish overall on NVIDIA. This quarter represents its 4th consecutive beat on earnings and although some numbers haven’t returned to FY 18 highs, the company is making strides in core business units (Gaming, Data Center) as well as significant strides in emerging spaces like AI inference which is going to be an important battle front for the company. 

I expect competition to stay fierce in the AI space, but NVIDIA’s long held leadership in AI training has set the company up well to emerge as one of, if not the leader in the AI evolution. Recent benchmarks set by the company along with launches like Jetson Xavier NX for Edge/IoT AI reflect its ambition and while some of these items don’t yield short term quarterly beats, they are reflective of stability and market share gains that will stabilize growth over the coming years making the long-term outlook compelling for NVIDIA. 

Read more Analysis from Futurum Research:

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Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

Image: NVIDIA

Daniel Newman

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. From Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited by CNBC, Barrons, Business Insider and hundreds of other sites across the world. A 7x Best-Selling Author including his most recent “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
Daniel Newman