Nvidia: It's on between Gaming & Data-Center Business Units

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I'm having this delicious NYT Chocolate Mug Cake

When it announced its earnings results on August 19th, 2020, Nvidia (NVDA) topped Wall Street’s estimates for both its fiscal 2020 second quarter and its forecast for the rest of the year. More interestingly its data-center sales topped its core gaming business for the first time.

What’s making the case for Nvidia?

  • Nvidia’s data center business is surging: Nvidia provides GPUs which power the heart of AI and machine learning. Demand for these powerful processors is expected to continue to surge at enterprise data centers (and cloud providers of course) as ML and AI become mainstream and more enterprises go to the cloud. 

  • Gaming is also on the rise: In addition to ML and AI,  GPUs are in high demand for video games. The pandemic has made gaming one major way for a wide range of age groups to socialize virtually. Even better, we are close to the holiday season and major video game console makers such as Nintendo, Sony, Microsoft are going to refresh their gaming consoles. Major games are going to be released. The new consoles and games will raise the tide for Nvidia and the entire gaming industry. 


Nvidia is very well positioned to become the de facto standard for parallel processing and GPUs, and hence become very dominant in data centers.


What’s not working for Nvidia?

  • Nvidia’s automotive business has lost momentum: Nvidia’s early-mover advantage in automotive (self-driving specifically) has faded away. For example, Tesla and Waymo (Google) are not using Nvidia’s GPUs in their self-driving platforms and are making their own TPUs instead. Faced with ever-increasing competition in the market for automotive chips, Nvidia resorted to selling end-to-end automotive systems to OEMs (original equipment manufacturers) and automakers. This was starting to pay off as Nvidia’s self-driving platforms started gaining adoption then Covid hit and Nvidia’s automotive revenue declined further. 

  • Weakening Automotive Industry: Prior to Covid, global auto sales were down. Covid made matters much worse. The automotive weakness is bad news for Nvidia, because automakers won't be inclined to spend on new and complex technology such as self-driving at a time when they are busy closing down plants and laying off workers. 


Despite Nvidia's (and investors’) high hopes for its auto business, it’s not expected that this line of business will produce consistent results until and unless self-driving cars start hitting the mainstream and Nvidia's partners begin launching vehicles based on its platforms. There's no doubt that autonomous public transportation is a big opportunity for Nvidia. However, investors shouldn't expect it to move the needle in a big way for the company anytime soon.


After its blow-out quarter, Is Nvidia still a good long term investment? Can it beat the returns on VOO over the next two years? Drop a line and let me know what you think.

 

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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