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NVIDIA - graphics sales drive revenues and profit boom

Nicholas Hyett, Equity Analyst | 19 August 2021 | A A A
NVIDIA - graphics sales drive revenues and profit boom

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NVIDIA Corp USD0.001

Sell: 189.86 | Buy: 189.89 | Change -2.26 (-1.18%)
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Nvidia reported second quarter revenues of $6.5bn, up 68.3% year-on-year, with growth across all the groups key market segments and particularly positive results in graphics.

Underlying operating profits rose 102.6% to $3.1bn, reflecting a slight improvement in gross margin and only a modest increase in operating expenses.

The group announced quarterly dividend of $0.04 per share to be paid in September.

NVIDIA shares rose 2.3% in aftermarket trading.

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Our view

Gaming has been enjoying a golden era and NVIDIA's chips are right at the heart of it - it's RTX 30 series has been described as "the most revolutionary graphics card in years". With gaming sales booming, it's no surprise the bottom line is accelerating like a Mario Karter after a Mega-Mushroom power up.

The power of NVIDIA's chips means they're increasingly in demand outside the world of consoles and joysticks.

The group has actively altered its mainstream chips to make them less effective for cryptocurrency mining (which was eating up global supply). But sales of its dedicated crypto cards still hit $266m in the second quarter. The 'Professional Visualisation' division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile the DRIVE platform gives it a stake in the potentially exciting self-driving car market, with a product that can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward". Both end markets have seen sales accelerate as the economy recovers from coronavirus.

However, it's the Data Centres business which has been the real engine room of growth in recent times.

As well as powering some of the world's most powerful supercomputers, NVIDIA produces cutting edge hardware for training artificial intelligence (AI) software. It's this AI expertise, enhanced by the $6.9bn acquisition of Mellanox, which is being used as the strategic rationale for the blockbuster ARM deal.

ARM designs chips and licences out its technology, staying well clear of any manufacturing or direct sales processes. This is a very cost-effective way of operating, with capital requirements pretty minimal, and means over 180bn ARM technology chips have been shipped since the group was founded. It also means there are millions, if not billions, of devices in use today running on ARM chips.

As well as the fundamentally attractive core business, it's ARM's global reach that has attracted NVIDIA. If it can perfect its AI technology and integrate it into devices from smartphones to supercomputers, that would place it at the heart of the next technology revolution.

The deal is expensive though, and a lot of the cost is being met by issuing new shares. While the cash component is manageable, issuing new shares will dilute existing investors and that will be particularly painful if the deal doesn't work out. The deal has also run into competition concerns in the UK and EU - so is one to watch. The whole plan could yet be derailed by regulators.

Looking back at the core NVIDIA business, the group enjoys a neat business model of its own. NVIDIA outsources all of its manufacturing. Avoiding the costs, capital and risk associated with owning manufacturing facilities has generally helped NVIDIA deliver impressive gross margins and cash flow.

High gross margins help fund the research & development budget, which stood at $3.9bn last year. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet (at least until the ARM deal completes) 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 at the moment, and there's a very modest dividend on offer.

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 on a PE ratio nearly 61% above the ten-year average. Add to that a real risk that the ARM deal fails to complete and there are reasons to be cautious.

NVIDIA key facts

  • Price/Earnings ratio: 46.0
  • 10 year average Price/Earnings ratio: 28.6
  • Prospective yield (next 12 months): 0.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Gaming revenues rose 85% year-on-year to $3.1bn, making it Nvidia's single largest division. That reflects continued growth in GeForce GPUs, particularly of the GeForce RTX 30 Series, as well as good growth in consoles. The group has introduced new GPUs which are less appropriate for crypto mining to try and ensure more GeForce chips reach gamers.

The Data Centre business saw sales rise 35% to $2.4bn, reflecting growth in Ampere architecture products. Growth was led by large "hyperscale" customers.

Professional Visualization sales rose 156% to $519m, as desktop workstation sales increased now lockdowns have finished. Similar trends boosted the Automotive business, where sales rose 37% to $152m.

OEM and Other saw sales rise 180% to $409m with growth driven by sales of Crypto Mining Processors which accounted for $266m of revenue.

The group reported an underlying gross margin of 66.7%, compared to 66.0% a year ago. That reflects higher average sales prices for desktop GeForce GPUs. Operating expenses rose just 9.1%, as the group lapped Mellanox related acquisition costs last year.

Nvidia reported free cash flow in the quarter of $2.5bn, up from $1.3bn. Net cash at the end of the quarter stood at $7.7bn, versus $4.6bn at the start of the year.

Nvidia expects revenue to continue to grow into the next quarter, although gross margins may fall slightly and operating expenses to rise.

Find out more about Nvidia shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refnitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.


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