NVIDIA’s Data Center Business Caught in Weak Demand Cycle

NVIDIA’s datacenter headwinds

Previously, we saw that slow adoption of ray tracing technology and weak demand in China is reducing NVIDIA’s (NVDA) gaming revenue. However, gaming headwinds alone are not responsible for the $500 million decline in the 2019 fourth-quarter revenue guidance.

The previous guidance of $2.7 billion excluded data center headwinds but the revised guidance of $2.2 billion included the impact of data center deals that didn’t close during the quarter. The company stated that cloud customers have become cautious with their spending amid the weak macro-economic environment.

NVIDIA’s Data Center Business Caught in Weak Demand Cycle

Weak demand from cloud customers

Weakness in the data center doesn’t come as a surprise because Intel (INTC) also reported a slowdown in data center revenue as cloud customers shifted from purchasing capacity to absorbing capacity. Its YoY data center revenue growth slowed to 9% in the fourth quarter of 2018 after rising more than 20% in the first three quarters of 2018.

NVIDIA’s data center revenue has been growing at an extraordinary rate for the last 11 quarters. This growth was likely to slow at some point in time. While NVIDIA did not give a breakup of data center and gaming revenue, we expect its YoY data center revenue growth to slow to 24% from above 50%.

AMD’s and Xilinx’s data center growth

At a time when the entire data center market is slowing, smaller players like Advanced Micro Devices (AMD) and Xilinx (XLNX) reported strong growth in data center revenue as they benefitted from gaining market share. Xilinx’s data center revenue rose 14% YoY in the December 2018 quarter. This benefit of market share gain was not available to market share leaders Intel and NVIDIA.

Should NVIDIA’s investors worry about data center headwinds?

The data center is NVIDIA’s fastest-growing segment and the key growth driver of its stock. A slowdown in data center growth poses a warning for NVIDIA’s investors. However, Jefferies analyst Mark Lipacis expects NVIDIA’s data center growth to rebound faster than Intel’s driven by secular demand for parallel processing and AI (artificial intelligence).

In the long term, NVIIDA’s data center growth will likely normalize and new growth drivers of automotive and edge computing will emerge. Next, we will look at NVIDIA’s profit margins.

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