Nvidia Earning Analysis: From Chip to System

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In the Fiscal Year 2020, Nvidia’s “AI business” resumed its astronomic growth, revenue from the data-center segment spiked more than double (124%) from the previous period (from ~3B to 6.6 B). In our Nvidia earning analysis, we try to understand what is behind that impressive leap.

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In This Issue

Officially, Nvidia’s “AI business” is recorded as a data-center segment in all its SEC filings. Interestingly, not only this time did the data center record more than a 100% jump in revenue. In the fiscal year 2016, Nvidia sales from the data center exploded to 830 M from 339 M in the previous period.

In 2019, Nvidia acquired Mellanox then completed that corporate action in May 2020 – thus it is logical to think that Mellanox is responsible for the revenue leap.

Mellanox business itself is complementary (has no intersection) with Nvidia before acquisition. Nvidia business is supplying hardware (GPU along with an ecosystem) for cloud providers like Amazon, Microsoft, and Google. At the other node, Mellanox business is offering “cloud communication” that allows the cloud apps and data could be executed in speed and scale (yeah, the client is that cloud triumvirate – Amazon, Microsoft, Google).

So, that growth isn’t organic. I would like to say that the impressive leap in Nvidia revenues isn’t due to AI demand alone, but also an addition of a new AI-related business unit.

Important Note
  1. AI demand for Nvidia data center is just so good, but it isn’t only her that brings more than 100% spike.
  2. The inclusion of Mellanox is the one who made that number
Mellanox contribution as our Nvidia earning analysis
Income Statement FY 2020
Interest expense, no problem

Business Transformation

We have seen that corporate may experience some transformation, whether to survive or to create a better position in the market. In its early days, Amazon is a bookseller, Apple is an “expensive computer” maker, and Microsoft is an IBM partner for IBM OS.

Look how they are evolving.

Amazon now is a shopping platform with its “Prime” subscription for books, electronics, video, almost everything you need. Currently, Amazon is working on its telemedicine service “Amazon care”. Microsoft now transforming to dominate the professional world, it offers OS, cloud services Azure, 365, servers, even a community: LinkedIn and GitHub. Microsoft has left its glorious days which are too reliant on Windows and Office business.

Like them, we see Nvidia is on the journey to evolve.

In December 2016, Nvidia held a company presentation with the title: “GPU Computing, The Next Era of Computing.” It is a strategic commitment to transforming the company from a gaming chipmaker into a GPU supplier for the AI computing industry.

Since then (from 2015 to 2020), the GPU data center revenue grow 10 times.

And it doesn’t stop there.

The acquisition of Mellanox seems to be another game-changer. With more than 30% contribution to data center revenue, Nvidia isn’t a GPU company anymore, instead, it is an AI infrastructure vendor – so we see the other metamorphosis.

Nvidia’s strategy reminds us of Apple. In its debut, Apple uses the Samsung chip to power its iPhone. Today, Apple is on its way to power all its devices with its in-house chip: A-series processor for iPhone and M series for MacBook and MacMini. This step isn’t taken to take over the processor market but to harmonize its software hardware even more. Along with its services segment, Apple becomes more similar to a platform company – like Amazon or Microsoft.

Nividia has an identical trend.

Mellanox acquisition gives its access to networking technology for AI and by possessing it, Nvidia is on the way to becoming an all-in-one AI solution. If we’re allowed to speculate further, Mellanox’s acquisition enables Nvidia to protect its business with scale and integrated advantages. As we already know that the cloud provider is developing its own in-house GPU (like Google Tensor), and a rival like Intel (with Nervana), Nvidia’s accelerating step (acquiring Mellanox) give no chance its rival to catch a breath.

Back for a while to financial things, the acquisition of Mellanox comes with interest expense since the Santa Clara-based company fund some of it with the debt. Though even the interest expense tripled from the previous period (52 M to 184 M) we could say it is still manageable and measured. With more than 4 B in earning, interest expense doesn’t hurt Nvidia’s earnings.

Segment Contribution in Nvidia Earning Analysis: The Money Game

Transformation is happening right now but the gaming segment is still the largest contributor to the company revenue. Nvidia gaming segment revenue jump around 50% from the previous period – from 5.5 B to 7.7 B, thanks to working from home.

Segment analysis in our Nvidia Earning Analysis
Segment Contribution for FY 2021

We believe Nvidia gains an advantage from its RTX 30 line which offers ray tracing technology. This trend will keep continuing due to Nvidia’s strong relationships (Uhm…) with game developers: Games are optimized for Nvidia driver and hardware, and vise versa. Therefore, Nvidia never experienced driver trouble or crash like its rival AMD.

For readers with no gaming background, Ray tracing is technology to make games more realistic with regard to light behavior. Imagine your character in the dark dungeon, and it seeks the way out. She cast magic that destroys and blasts the wall of the dungeon. Ray tracing makes it doesn’t look weird – it adjusts the reflections of the ray, character shadows, flares from the sun dynamically. Simply said, ray tracing gives a more stunning visual experience.

The Player: Console versus PC

Regarding its gaming segment, when we compare its growth from 2018 to 2020 and from 2015 to 2017, we find that this segment is getting slow – it keeps growing but somehow, it is decelerating. Moreover, with last-generation consoles like Xbox and PlayStation using AMD chips to power their gaming devices, we need to remain objective.

No, we aren’t worried, we just keep cautious.

Important Note
Though Nvidia now is an AI company, it is undeniable that gaming has the largest contribution of revenue. Nvidia has stronger compatibility and technology over its rival, but investors need to be cautious since the industry is extremely competitive

Investor Takeaway

  1. Well, simply no chance for competitors to steal Nvidia’s share in the AI business as the company becomes more integrated.
  2. Mellanox acquisition gives more room for Nvidia to grow, even when its core “AI business” isn’t meteoric anymore – someday.
  3. Keep watching the game, Nvidia technology is far away from its rival, but something could change dramatically in this industry.

Nvidia Earning Analysis: Into Valuation

Our Nvidia earning analysis come into a valuation that can be summarized below:

  1. In May 2021, Nvidia’s PE ratio is around 80 – it isn’t normal at all, and thanks to the FED to keep our stock market inflating.
  2. If Nvidia could double its earnings again in foreseeable future, this current “expensive” valuation could be justified. Double its current earning, so the PE looks like 40, double again, then we have 20, double again, and we have 10 P/E. The question is, how much Nvidia could generate this “miraculous” growth? With regard to this, we need to keep an eye closely on the AI business, any significant disruption will cancel our investment scenario.
  3. If everything doesn’t change, we will try to buy Nvidia in every significant dip.