- AN EXCELLENT QUARTER. Nvidia just closed an excellent second calendar quarter (their fiscal second quarter 2024). Revenue more than doubled year-on-year (by 102%, to be precise), to $13.5B. A big gain, to be sure, but still only bumping the company from the world’s number 6 semiconductor company to its number 5. Of course, more rungs of the ladder may be climbed by Nvidia if the AI craze continues.
- AI CHIPS MAJOR SOURCE OF GROWTH. Artificial intelligence brings us to looking at Nvidia’s product segments – where is that growth coming from? Only two of Nvidia’s segments really matter: Data Centers, now making up 76% of Nvidia’s business, and Gaming, worth 18%. There are also Professional Visualization, Automotive (mostly for self-driving applications), and OEM and Other sales. But these are tiny, standing for a combined revenue of only 5% in the last quarter. (Please forgive the 1 point rounding error.)
Data Centers is providing ultra-fast chips for, well, data centers, especially for those running AI applications starving for cycles. Gaming is providing gaming chips and graphics adapters for PCs and consoles. The former grew by an astonishing 171%, thanks to the aforementioned AI boom. While it is unclear how much of a revenue boost AI applications will eventually supply for the companies that develop them, providing the chips to those companies is lucrative indeed. As any San Franciscan knows, including this one, it is more lucrative to sell pans and shovels to gold diggers than digging for gold.
Gaming on the other hand grew by only 22% – and that from a revenue pothole a year ago from which Nvidia has only just begun to recover. That shortfall seems to have been caused by a combination of consumers slowing spending on video game gear and an oversupply of electronics. When the company hit that pothole, during the calendar quarters 3Q22 – 1Q23, Gaming sales declined by a painful average of 17%. And even going forward, generally speaking, Gaming’s potential is nowhere near that of the Data Center segment.
- AI BROUGHT STRIKING TRANSFORMATION. Moving on to the big picture, it is fascinating to see just how much of a transformation Nvidia has gone through in the past four years. Total sales grew more than fivefold from the second calendar quarter of 2019 to this last quarter. During that time, Data Centers’ contribution to the topline more than tripled from a mere 25% to 76%, with segment revenue growing by a factor of more than 15x. Meanwhile, Gaming didn’t even quite double sales, with its revenue share declining from 51% to 18%.
- SUCCESS BREEDS RISK. But with the fabulous success of Data Centers also comes risk. For one, Nvidia outsources its chip production. That introduces a lag when it needs to react to increasing demand quickly. It may be struggling to satisfy demand. Next, when three quarters of a company’s revenue come from one segment, one starts to wonder just how prone to disruption of that segment the company is. What happens if the AI fever breaks.
And finally, as the rivalry between the United States and China is heating up, the Biden administration has banned the export of the most advanced AI chips. Nvidia said that exposed it to a potential sales decline of about $400M per quarter or a moderate 5% of total sales. Historically, the People’s Republic stood for 25% of sales on average, so one fifth of that would be at stake. Nvidia stated that so far, by developing slower chips for China, they had circumvented that danger. Even so, the share of the Chinese market has declined in recent quarters by about 5 points. It is unclear if that stemmed from AI chip export restrictions or a decline in Gaming. What’s more, the Biden administration has made noises it might tighten export controls even more.
- AI-CHIP SALES STRATOSPHERIC, STOCK PRICE, TOO. Nvidia’s stock price was up by just 3% in after-market trading despite the stellar Data Centers result. But then, most of the AI upside was already priced in: The company’s stock is up by 288% or almost fourfold since late September.
W Media Research 