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NVIDIA - AI and gaming sales drive record revenues

Nicholas Hyett, Equity Analyst | 19 November 2021 | A A A
NVIDIA - AI and gaming sales drive record revenues

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NVIDIA Corp USD0.001

Sell: 233.51 | Buy: 233.57 | Change -7.76 (-3.21%)
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Nvidia reported record third quarter revenue of $7.1bn, up 50% year-on-year, with particularly strong growth in data centres and professional visualization.

Operating profits rose 91% to nearly $2.7bn, with only a modest increase in sales, general & administrative expense.

The group plans to pay dividends of $0.04 cents per share in the final quarter.

NVIDIA shares rose 10.8% following the announcement.

View the latest NVIDIA share price and how to deal

Our view

Gaming has been enjoying a golden era and NVIDIA's chips are right at the heart of it - its RTX 30 series has been described as "the most revolutionary graphics card in years". But 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 booming. 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 serious competition concerns around the world, which could yet derail the whole plan.

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 more than double 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 (next 12 months): 64.0
  • 10 year average Price/Earnings ratio: 29.6
  • 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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Third Quarter Results

NVIDIA reported Gaming revenues of $3.2bn in the third quarter, up 42% year-on-year, with strong demand in the lead into the holiday period.

Data Centre revenue rose 55% to $2.9bn, driven by sales to large cloud computing and natural language processing customers.

Professional Visualisation sales rose 144% to $577m, with growth in laptops and workstations as employers move to hybrid working set-ups.

Automotive sales rose 8% to $135m, with increased demand form self-driving programmes.

OEM and Other sales rose 21% year-on-year, driven by demand from crypto-currency miners.

Free cash flow in the half was $1.3bn, up from $806m a year ago, thanks to rising operating cash flows and lower capital expenditure. As a result net cash finished the quarter at $8.4bn, up from $4.6bn at the start of the year.

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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.