Nvidia: Looking for the next "mining boom"

Nvidia CEO Jensen Huang once described 2018 as a "very bad year." But after the first quarter of this year, he announced that Nvidia was "back on the upward path."

On May 16, local time, Nvidia released its quarterly financial report. In the first quarter of 2019, Nvidia's revenue was $2.22 billion, down 31% year-on-year. The revenue of the mainstay gaming sector was $1.05 billion, down 39% from the same period last year, but up 11% from the previous quarter. Nvidia's data center business, which is being increased, saw a decline in customer demand, with revenue of $634 million, down 10% year-on-year.

Although Nvidia's main business revenue performance is still far below the same period last year, it has rebounded compared to the worse fourth quarter of last year. Due to better-than-expected financial results, Nvidia's stock price rose 6% after the market. However, the stock price fell again because the conference call revealed that the demand for data centers was difficult to recover.

As the cryptocurrency mining boom receded, Nvidia's chip sales also fell into a low ebb, and it had to seek development in other areas. Nvidia's GPU sales revenue in the first quarter was US$2.02 billion, down 27% from the same period last year, but up 2% from the previous quarter.

Huang Renxun announced three major business priorities for this year in a conference call: first, RTX ray tracing technology that enables game rendering with movie-level quality; second, a platform that provides supercomputing capabilities for artificial intelligence; and third, robotics and artificial intelligence technologies for industries such as autonomous driving and smart retail. Huang Renxun expects to complete the acquisition of Israeli chip company Mellanox by the end of the year to further drive growth.

Nvidia unveiled its business transformation plan with an acquisition to build data centers that provide services for artificial intelligence research and development. In the first quarter, Nvidia announced a final agreement to acquire Israeli chip company Mellanox for $125 per share, with a total value of approximately $6.9 billion. Nvidia expects the acquisition to be completed by the end of this year and to increase Nvidia's gross profit margin, earnings per share, and free cash flow.

Nvidia hopes to use this acquisition to build a "giant computing engine" - a data center, to cope with the explosive growth of massive data and computing needs, and to generate revenue from it.

Unfortunately, data center sales encountered difficulties in the first quarter, with customers "pausing" orders, and demand may even continue to be sluggish in the second quarter. Nvidia's data center revenue in the first quarter was $634 million, down 10% from the same period last year and 7% from the previous quarter. Nvidia said in its financial report that this was mainly affected by the slowdown in purchases by some hyperscale data centers and corporate customers. Nvidia's competitor Intel has also encountered the problem of slow digestion of data center inventory.

Huang Renxun responded in a conference call that many customers purchased a large number of data center products last year and are digesting their inventory, so they have stopped purchasing. However, he believes that conversational AI, which enables direct conversations, is the focus of many technology companies' research and development. In addition, many industries are generating massive amounts of data and hope to use them, which will stimulate the demand for data centers.

Nvidia's gaming revenue in the first quarter was $1.05 billion, down 39% from the same period last year and up 11% from the previous quarter. The year-on-year decrease was mainly due to a decline in shipments of gaming GPUs and gaming SOC chips.

Nvidia has also joined the emerging cloud gaming service. Huang Renxun said that Nvidia's cloud gaming platform GeForce Now currently has 300,000 monthly active users, and there are millions of users on the waiting list. In addition, Nvidia plans to vigorously promote ray tracing technology to become the standard in the gaming industry, and it has been integrated into the two major game engines Unreal and Unity.

Autonomous driving is also one of Nvidia’s strategic priorities. In the first quarter, Nvidia’s revenue in the automotive sector was $166 million, up 14% year-on-year and 2% quarter-on-quarter, mainly due to sales growth of autonomous driving-related products.

NVIDIA is developing the autonomous driving R&D platform NVIDIA DRIVE AGX to provide services to many autonomous driving R&D companies. Huang Renxun predicts that this will be a $30 billion market. In the first quarter, NVIDIA cooperated with Toyota Motor to develop autonomous driving cars and also launched L2-level autonomous driving solutions, simulation platforms and other tools.

Nvidia expects revenue of $2.55 billion for the next quarter, plus or minus 2%. Non-GAAP gross margin is expected to be 59.5%, and operating expenses are expected to be approximately $765 million.