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Nvidia - Back in growth after cryptocurrency disruption

Nicholas Hyett | 17 May 2019 | A A A
Nvidia - Back in growth after cryptocurrency disruption

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NVIDIA Corp USD0.001

Sell: 183.35 | Buy: 183.36 | Change -5.44 (-2.88%)
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First quarter revenues of $2.2bn were 30.8% below the same period last year, reflecting the anticipated collapse in cryptocurrency demand. However, revenues were very slightly up on the previous quarter, with a return to growth in gaming.

Operating profit fell 72% year-on-year to $358m, up 22% quarter-on quarter.

The group announced a quarterly dividend of $0.16 per share.

The shares rose 2% in after-hours trading.

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Our view

Nvidia was founded in 1993 to make graphics chips for PC's, producing the first graphic's processing unit (GPU) in 1999. The invention of the GPU, and similar chips from rivals, simplified 3D graphics and sparked a massive revolution in gaming.

The group's been at the forefront of gaming and graphics technology ever since. Gaming still accounts for 56.9% of sales, and industry wide revenues are expected to grow 9.3% a year in the five years to 2021. Nvidia should be in line for a healthy slug of that growth.

But Nvidia's chips are increasingly in demand outside the world of consoles and joysticks.

The 'Professional Visualisation' division supports digital design and engineering work in industries like architecture, oil & gas and medical imaging. Meanwhile Nvidia's GPUs help provide the processing power behind artificial intelligence and machine learning through the 'Datacentres' business.

It might come as something of a surprise, but Nvidia also has a stake in the potentially transformative self-driving car market. Its DRIVE platform can "perceive and understand in real-time what's happening around the vehicle . . . and plan a safe path forward".

But Nvidia doesn't just have growing end markets. Its business model is also fundamentally attractive.

Its cutting edge technology commands a high price, and the group outsources all of its manufacturing. Without the costs, capital and risk associated with owning manufacturing facilities, Nvidia's been able to deliver some very impressive gross margins. A significant chunk of the proceeds are reinvested through the research & development budget, which at $2.4bn accounted for 70.6% of operating expenses last year.

With net cash on the balance sheet and hefty operating cash flows, it's difficult to see Nvidia as anything other than a very high quality business. Unusually for a US tech company, the group's proved willing to return surplus cash to shareholders - some $1.95bn last year. That's mostly through share buyback's, but there's a 0.4% prospective dividend yield on offer too.

The group's strengths are reflected in its rating to some extent though - which at 26.9 times may be below its recent average but is still formidable. Investors should also bear in mind that in such rapidly changing industries winds change swiftly.

Nvidia benefitted from a massive surge in demand for its products from cryptocurrency miners in 2017 and 2018 - totalling around $579m of sales. Going forward, crypto related revenues are expected to be negligible and the dramatic change in demand dynamics has hit gaming too.

It's no surprise that the crypto-Gods giveth and they taketh away. But it's an experience that's well worth bearing in mind for a business at the cutting edge of some pioneering industries.

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First Quarter Results

Gaming revenue fell 39% year-on-year to$1.1bn, as the group continued to struggle with industry oversupply following the collapse in demand from cryptocurrency miners. However, the division reported 11% quarter-on-quarter growth.

Professional Visualisation revenues of $266m were 6% ahead of last year, with strength across both desktop and mobile. Data Centres saw revenues fall 10% year-on-year to $634m, with a slowdown among some hyperscale and enterprise customers. Automotive sales rose 14% to $166m, driven by growth in AI cockpit modules.

Operating expenses rose 16% year-on-year, largely down to increased headcount and higher compensation costs. The combination of increased expenses and lower revenue meant gross margins fell 5.7 percentage points to 59%.

The $6.9bn acquisition of Mellanox was agreed during the quarter - boosting the group's data centre architecture for high performance computing and AI. The deal is expected to boost earnings per share and cash flow from day one.

Net cash remains over $5bn, despite free cash flow more than halving to $592m.

Management expect revenue to hit $2.55bn in the second quarter, with gross margin improving slightly to around 59.5%.

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