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Hyperscale Spending and NVIDIA’s and Intel’s Data Center Revenue

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May. 29 2019, Updated 3:09 p.m. ET

NVIDIA’s data center business

NVIDIA (NVDA) stock saw triple- and double-digit percentage growth in 2016 and 2017 on the back of strong gaming and data center demand. Data centers form NVIDIA’s fastest growing business, as it has a first-mover advantage in AI computing. Its data center business grew almost ninefold from just $340 million in fiscal 2016 to $3 billion in fiscal 2019 as it expanded applications of its general-purpose GPUs.[1.graphics processing units]

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However, NVIDIA’s data center revenue was impacted in the fourth quarter of fiscal 201, and it reported its first sequential revenue decline in more than three years. The fall came as hyperscale consumers paused their spending. This pause also impacted Intel’s (INTC) data center business, which reported its first YoY (year-over-year) revenue decline in more than two years in the fourth quarter.

The trend continued in the first quarter of fiscal 2020, and NVIDIA’s data center revenue fell 9.6% YoY, marking its first YoY decline in more than three years. Data center spending has become uncertain amid US-China trade tensions.

NVIDIA’s data center outlook clouded

During NVIDIA’s fiscal 2020 first-quarter earnings call, CEO Jensen Huang stated that hyperscalers have paused their spending as they are absorbing the excess capacity they built in the second half of fiscal 2019. However, he does not expect this trend to last.

Supporting Huang’s statement, NVIDIA CFO Colette Kress stated that whereas the company had challenges closing deals in the fourth quarter of fiscal 2019, it closed a satisfactory number of deals in the first quarter of fiscal 2020. This trend shows that some hyperscalers have started spending while others are holding off. She added that demand uncertainty has clouded data center guidance for the second quarter of fiscal 2020 but things are positive in NVIDIA’s growth segments. Huang stated that while hyperscale demand remains weak, NVIDIA is seeing strong demand in inference, enterprise and edge servers, and render farms.

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