Nvidia Stock Looks Good on Rising Data Center Demand

Chip maker Nvidia (NVDA) mainly relies on its gaming and data center businesses for revenue. While gaming is its largest business, the data center is its fastest-growing one. However, these segments haven’t been performing well since October last year.

Nvidia’s data center business

The company’s data center business surged from just $340 million in fiscal 2016 to $3 billion in fiscal 2019. This growth came as the number of applications using its GPUs (graphic processing unit) expanded. The chip giant also had a first-mover advantage in AI computing.

However, Nvidia’s data center business took a hit in the fourth quarter of fiscal 2019. Its revenue fell sequentially for the first time in the quarter after growing for over three years. The decline in its revenue came after some large hyperscale consumers temporarily stopped their spending. These hyperscalers hit pause after opting to absorb the big purchases they’d made in early fiscal 2019. Rival Intel (INTC) was also affected by the pause in spending. The uncertainty looming over the US-China trade war further worsened the growth in the data center space.

The decline in spending by hyperscale consumers continued to affect data center revenue in the following quarters. In all three of the company’s fiscal 2020 reported quarters, its data center revenue fell 9.6% YoY, 14% YoY, and 8.3% YoY, respectively.

Overall, Nvidia topped estimates on both earnings and revenue in the third quarter of fiscal 2020. Both were down YoY, but both improved sequentially in the quarter. Its earnings and revenue have been growing sequentially for the past three straight quarters. It’s provided weak guidance for the fourth quarter (which ends in January 2020).

Nvidia’s data center outlook is improving

As per CEO Jensen Huang in the company’s press release, “[The] gaming business and demand from hyperscale customers powered Q3’s results.” He added, “We extended our reach beyond the cloud, to the edge, where GPU-accelerated 5G, AI and IoT will revolutionize the world’s largest industries.”

Huang also told Jim Cramer on Tuesday’s Mad Money that Nvidia’s chips were “the engine of artificial intelligence,” as cited by Benzinga. A rise in demand for AI-related technologies helped to improve the company’s data center business in the third quarter. It expects its data center business to grow sequentially in the fourth quarter.

We believe the company is making efforts to focus on its high-growth data center business. During the third quarter, Nvidia partnered with Microsoft (MSFT) and developed Microsoft Azure Data Box Edge hardware product with its T4 GPUs. It also joined hands with VMware to boost VMware Cloud on Amazon Web Services using its T4 GPUs. It also used its AI technology in partnership with the United States Postal Service to increase the efficiency of package data processing. During the SC 2019 supercomputing event on November 18, Nvidia announced that it had again partnered with Microsoft’s Azure to roll out GPU-accelerated AI-based supercomputers. Like Nvidia, Intel is also focusing on growing its data center business.

Mellanox acquisition

Huang also pointed out the acquisition of Mellanox Technologies (MLNX) in a Benzinga report on November 20. The merger is pending and is expected to close in early 2020 upon approval from Chinese regulators. However, the CEO is now indifferent toward the deal. He told Cramer that Nvidia will be “fine without Mellanox” and vice versa.

The uncertain and prolonged trade war environment has raised doubts about the potential merger of Nvidia and Mellanox. In a Cabinet meeting on November 19, US President Donald Trump threatened to raise tariffs on China if a trade deal wasn’t reached, according to CNBC.

Meanwhile, we’re still hopeful the two economies will reach a trade deal soon. A deal would give the green light to Nvidia’s merger with Mellanox. It would also help the company expand its reach in the data center market.

Analysts’ view on Nvidia’s data center business

Analysts were bullish on Nvidia’s data center business even before its third-quarter earnings results. Cramer also has a bullish stance on Nvidia. He holds the stock through his charitable trust, according to CNBC.

A MarketWatch report posted on November 14 compiled several analysts’ views on Nvidia. Among them, Raymond James expects to see the company’s new 7 nm (nanometer) data center product in the first half of fiscal 2020. SunTrust Robinson Humphrey expects it to launch two new products—one in December 2019 and the other in March 2020.

Analysts expect Nvidia’s upcoming products to compete with those of rival Advanced Micro Devices (AMD) in the GPU space. AMD has already grabbed data center CPU market share from Intel. It boasts a 7 nm Zen 2 CPU it claims is better than Intel’s 14 nm CPUs in terms of price and performance.

Soon after Nvidia’s third-quarter release, many analysts, including Raymond James and SunTrust, raised their price targets on its stock.

Of the 41 analysts tracking NVDA, 29 give it “buy” ratings, while nine give it “holds.” Only three analysts recommend “sells” on the stock. Analysts have given it an average price target of $231.24, a premium of 9.5% to its closing price on November 20.

Stock price movement

NVDA closed with a rise of 1.53% to $211.18 on November 20. At this closing price, its market cap was $129.2 billion. Its stock was trading 1.6% lower than its 52-week high of $214.55 and around 69.7% higher than its 52-week low of $124.46.