- Investing in Nvidia has been a rollercoaster. We believe revenue growth will reaccelerate over the next 12 months to 30% plus after being down an average of 17% over the past three quarters. The company is entering a year of easier comps following the crypto business boom (2018) and bust (2019).
- While crypto is just under 5% of revenue, unwinding channel inventory over the past year had a negative 15% impact on revenue. As of Oct-19, we believe the crypto channel overhang has been cleaned up.
- The return to growth is reasonable, given Nvidia is a key hardware arms supplier to the long-term growth trends of gaming, AI/datacenter, and autonomous mobility.
- This Thursday (Nov 14th) Nvidia reports its October quarter. We expect positive results from the company based on upbeat macro commentary from Intel and AMD’s recent earnings reports, specifically about Dec-19 growth.
The NVDA Rollercoaster
In October of 2018 shares of NVDA hit their all-time high, and the company’s value reached $165B. Following the crypto bust, the market cap dropped to $83B in June of 2019. In the past three months, NVDA shares are up 37% (market cap $122B), compared to the Nasdaq which is up 8%, as investors gain confidence the company will return to growth in the Jan-20 quarter.
Intel & AMD Tone Bodes Well for Nvidia
In Sep-19, Intel’s desktop sales accelerated after three quarters of muted demand, a positive for Nvidia’s gaming sales.
Additionally, Intel saw early indications we are entering a multi-quarter buying cycle in the high-end performance computing space, which bodes well for Nvidia’s datacenter segment. In contrast, AMD’s Sep-19 datacenter high-end business sales declined due to what AMD described as longer cloud buying cycles. We believe part of AMD’s datacenter demand headwinds were attributed to market share loss to Intel and Nvidia.
Most importantly, both Intel and AMD guided Dec-19 top-line revenue to reaccelerate. The Street now expects Intel’s Dec-19 revenue to be up 3% y/y, compared to flat in Sep-19, and AMD to be up 48% y/y in Dec-19 compared to up 9% in Sep-19. This increases our confidence that Nvidia revenue will meet Street expectations for Oct-19 of down 9% y/y, and the company will guide Jan-20 revenue in line with the Street, which calls for a rebound to 39% growth.
Long-Term Growth Justified by Data Centers and Autonomy
Nvidia’s legacy business is selling graphics cards for gaming, which accounts for about half of revenue today. The “graphics card” description is misleading, given Nvidia’s graphics cards are used outside of gaming for applications from Matlab scripting in university labs to crypto mining which drove the ramp up in demand for gaming products in 2018. Nvidia’s 3-5 year growth story will be dominated by the datacenter space, where their GPUs are an essential computing solution to all types of machine learning algorithms being deployed by Google, Amazon, Facebook, Apple, and other fortune 500 companies. Beyond five years, we believe autonomous mobility applications will support continued 15% plus revenue growth.