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NVIDIA - record Data Center revenues

Sophie Lund-Yates, Equity Analyst | 14 February 2020 | A A A
NVIDIA - record Data Center revenues

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NVIDIA Corp USD0.001

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Fourth quarter revenues rose 41% year-on-year to $3.1bn, which was better than analysts expected. That includes record Data Center revenues.

In response to potential disruption from the coronavirus, the group has reduced revenue guidance for next quarter by $100m, it now expects revenue within 2% of $3bn.

A quarterly dividend of $0.16 per share was announced, and the shares rose 6.4% in pre-market trading.

View the latest NVIDIA share price and how to deal

Our view

NVIDIA has been at the forefront of gaming and graphics technology since its formation in 1993. Gaming still accounts for half of sales, meaning NVIDIA is well placed to capitalise on the growing gaming industry.

But the power of NVIDIA's chips mean they are increasingly in demand outside the world of consoles and joysticks.

The 'Professional Visualisation' division supports digital design and engineering work in 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. And it's this area of the business behind the impressive outperformance at the moment, and new products coming through the pipeline means positive momentum could be here to stay.

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".

If growing end markets is one attraction, the group's neat business model another.

The group outsources all of its manufacturing and without the costs, capital and risk associated with owning manufacturing facilities NVIDIA's delivered impressive gross margins. This helps fund M&A, like the $6.9bn acquisition of Mellanox, which should boost data centre architecture for high performance computing and AI.

High gross margins also help fund the $2.8bn research & development budget. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

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 willing to return surplus cash to shareholders, mostly through share buybacks, although these are on hold until the Mellanox acquisition's done and dusted. There's currently a 0.3% prospective dividend yield on offer too.

It hasn't been totally smooth sailing - NVIDIA benefitted from a massive surge in demand from cryptocurrency miners in 2017 and 2018, which has since dried up, making for some tough comparisons. Business levels are normalising, but we'd not rule out further ups and downs from here.

Overall it's hard not to be impressed by a business at the cutting edge of some pioneering industries. But keep in mind all those strengths come at a price - the shares change hands for 37 times expected earnings, some way above the ten year average.

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Fourth quarter results (numbers are underlying unless otherwise stated)

Gross margins improved 9.4 percentage points to 65.4%, which reflects the higher revenues and improved efficiency in Gaming inventory management. As a result net income more than doubled compared to last year to $1.2bn, and was a lot better than the market expected. The improvement came despite a 7% rise in operating expenses, including higher staff and infrastructure costs.

The Gaming business saw fourth quarter revenue rise 56% year-on-year to $1.5bn, reflecting higher sales of GeForce desktop Graphic Processing Units (GPUs). Although for the year as a whole revenue was down 12%, reflecting lower sales of GeForce desktop GPUs overall.

Data Centres revenue rose 43% reaching $968bn. That was driven by improved performance from hyperscale and vertical industry end customers. The Pro Visualisation division posted a 13% increase to $331m, which includes strong growth in desktop and notebook work stations. The Automotive business recorded flat revenue.

The improved performance helped full year free cash flow reach $4.3bn, compared to $3.1bn a year earlier. The group ended the year with a net cash position of $8.9bn, compared to $5.4bn last year.

The group believes the acquisition of Mellanox will complete in the early part of 2020 and share repurchases will recommence after this.

Find out more about Nvidia shares including how to invest

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.