INVESTMENT THESIS
The four platforms are unchanged in the wake of the Mellanox deal, but NVidia has recast its reportable segments.
The two new segments are Graphics and Compute & Networking. Graphics includes GeForce GPUS for gaming and PCs, GeForce NOW game streaming, Quadro GPUs for enterprise professional design, GRID software for cloud-based and virtual computing, and automotive platforms for infotainment. The Compute & Networking segment includes data center platforms and systems for AI, HPC and accelerated computing; DRIVE for autonomous vehicles; and Jetson for robotics and other embedded platforms. Beginning in 2Q21, Mellanox revenue was included in Compute & Networking.
From an operational perspective in fiscal 3Q21, Graphics revenue of $2.79 billion (59% of total) was up 30% annually and 34% sequentially; sequential growth reflects normal seasonal strength in gaming. Compute & Networking revenue of $1.94 billion (41% of total) was up 123% annually and 9% sequentially, driven by strength in data center. Backing out the addition of Mellanox, Compute & Networking revenue still would have been up 52% annually and 7% sequentially on a purely organic basis.
On a segment basis, gaming revenue of $2.27 billion (48% of total) was up 30% annually and 37% sequentially, and represented an all-time record. In fiscal 2Q21, Data Center briefly dethroned gaming as the largest business, but gaming came roaring back in 3Q21 on normal seasonal strength fueled by the launch of the RTX series 30 Ampere gaming cards.
NVidia released three iterations of GeForce RTX 30 series Ampere gaming cards: the 3070, 3080, and 3090. The cards combine second-generation ray-tracing technology with AI, delivering twice the performance and power efficiency of predecessor product. Priced from $499 to $1,499, the devices have been hard to find to the frustration of serious gamers.
Other technologies were announced at the time of the RTX 30 launch, including NVidia Reflex (lower latency for quicker reaction times in games), and NVidia Broadcast, enabling eGamers to stream their battles while enhancing quality of microphones, speakers and webcams.
Gaming laptop demand was also strong. NVidia participates in console gaming by supplying GPUs to Nintendo Switch, which continues to experience strong demand. Participation in NVidia’s cloud gaming service, GeForce NOW, has doubled to five million users during the fiscal 2021 year. The service offers over 750 games, including 75 that are free to play.
Data Center revenue for 3Q21 totaled $1.90 billion (40% of total), up 162% annually and 8% sequentially; data center again set a revenue record. Mellanox contributed 32% of DC revenue; without Mellanox, this vertical end market still would have grown 77% annually and 6% sequentially on an organic basis.
According to the CFO, the three key growth drivers in the quarter were volume ramp of the A100 platform, continued momentum at Mellanox, and record shipments of T4 technology for inference. The A100 Ampere technology gained further adoption by cloud and hyperscale customers. AWS, Oracle Cloud and Alibaba have all announced availability to A100 instances in recent weeks, following ea
RECENT DEVELOPMENTS
Due to the early adoption by Google Cloud and Microsoft Azure, the A100 adoption is beginning to spread into industry verticals, as NVidia began shipments to server OEM partners whose broad enterprise channels reach a large number of end customers.
In addition to solutions comprising semiconductors and supporting software, NVidia produces hardware of its own in the DGX family of rackable servers. In the quarter, NVidia ramped the DGX A100 server. Designed for AI training, inference and analytics, the DGX A100 packs 4 Tesla V100 GPUs, 500 Tflops of AI power, over 5,000 Tensor cores and over 20,000 CUDA API cores. NVidia also began shipping DGX SuperPod, a turnkey system using Mellanox HDR InfiniBand to interconnect 20 to 140 DGX A100 systems to create a powerful AI supercomputer. One such SuperPod, with 80 DGX devices interconnected, will be built in Cambridge, England – home to ARM Holdings – in anticipation of that deal.
The two other platform businesses declined year-over-year in fiscal 3Q21, reflecting adverse pandemic impacts. However, both businesses recovered sharply on a sequential basis.
Professional visualization revenue of $236 million (5% of total) was down 27% annually while recovering by 16% sequentially. As workers return to offices, enterprise spending is again picking up.
During fiscal 3Q20, NVidia brought to open Beta its NVidia Omniverse, which it called the world’s RTX-based 3D simulation and collaboration platform. And it announced Omniverse Machinima, enabling software developers and creators to manipulate videogame assets animated by NVidia AI technologies.
Automotive revenue of $125 million (3% of total) was down 23% annually though up 13% sequentially. After nearly all vehicle production in the Americas and Europe shut down during the late winter and spring months, vehicle production resumed on a partial basis in summer 2020.
NVidia is powering next-generation MBUX cockpit systems in Mercedes-Benz S-Class sedans, with other modes to follow; MBUX AI features augmented reality heads-up display, AI voice assistant, and interactive graphics. Hyundai Motor Group’s entire vehicle lineup will come standard with NVidia DRIVE in-vehicle infotainment systems, starting with the 2022 model year.
For fiscal 4Q21, NVidia is modeling revenue of $4.80 billion, plus or minus 2%.
EARNINGS & GROWTH ANALYSIS
For fiscal 4Q21, NVidia is modeling revenue of $4.80 billion, plus or minus 2%. At the guidance midpoint, revenue would be up about 55% annually and 2% sequentially. Non-GAAP gross margins are forecast at 66.5%, +/- 50 basis points. Non-GAAP operating costs are forecast at about $1.18 billion; and non-GAAP tax rate is forecast at 7%-9%.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength ranking on NVidia is Medium-High. The NVidia balance sheet now fully reflects the acquisition of Mellanox. The ARM Holdings deal is structured to include $21 billion of the $40 billion purchase price in stock, which should allow NVidia to add a high-margin asset without a crushing debt load.
Cash was $10.14 billion at the end of fiscal 3Q21, down from $16.0 billion immediately in advance of the Mellanox acquisition. Cash, equivalents and investments were $10.90 billion at the end of FY20, $7.42 billion at the end of FY19, $7.10 billion at the end of FY18, $6.80 billion at the end of FY17, $5.04 billion at the end of FY16, and $4.62 billion at the end of FY15.
In terms of capital allocation, NVidia returned more than $3.0 billion to shareholders in FY20. During FY19, NVidia returned $1.95 billion to shareholders via buybacks and dividends. It returned $1.25 billion in FY18, $1.0 billion in FY17, $800 million in FY16, $1.0 billion in FY15, and $1.1 billion in FY14.
NVidia raised its quarterly dividend by 6.7% to $0.16 in December 2018; on 11/18/20, it declared its quarterly dividend at $0.16. The annualized payout of $0.64 yields about 0.12%. Our dividend estimates are $0.64 for both FY21 and FY22.
MANAGEMENT & RISKS
Jen-Hsun (‘Jensen’) Huang is co-founder, president and CEO of NVidia, as well as a board member. Chris Malachowsky, the other co-founder, is an NVidia fellow. Colette Kress is CFO; Debra Shoquist is EVP of Operations; and Jay Puri is EVP of World Field Operations. Acquisition risks from much larger ARM Holdings are partly offset by the half-stock nature of the deal, which limits new debt to be carried by NVidia, though it does dilute the stock.
Other risks facing NVidia include the possibility that CPU industry leaders such as Intel or Qualcomm could incorporate GPU functionality into their chipset and SoCs. While these devices may have some level of graphics capability, we believe that NVidia’s expertise, market leadership and continued investment in new technology gives it a sustainable advantage in its markets.
NVidia is also at risk from downturns in the global economy, which would reduce consumer and enterprise spending on technology investments. NVidia also risks investing extensively to support technologies, such as autonomous driving and VR gaming, that do not fully justify that spending. However, we believe that these two niches offer strong growth opportunities.
VALUATION
NVidia operates powerful and profitable franchises.
On November 19 at midday, BUY-rated NVDA traded at $532.45, down $3.70.
Source: Argus
