Nvidia’ s (NVDA) earnings report Tuesday highlighted three themes that the market has underappreciated about the chipmaker — developments that make clear the Club holding can maintain its standing as the world’s chief enabler of artificial intelligence. The semiconductor firm’s cutting-edge graphics processing units (GPUs) are still at the root of the company’s AI dominance, which has resulted in a ferocious rally in its stock price and a series of knockout earnings reports over the past year. At the same, there are three key areas aspects to Nvidia’s business that are increasingly coming into focus that show the company’s monstrous growth thus far still has more room to run. These include Nvidia’s networking and software sales, along with its expanding customer base. Some investors are selling Nvidia on Wednesday — perhaps to lock in gains on a stock that’s more than tripled year-to-date — leading to a roughly 2.5% decline at the close. While it’s hard to fault profit-takers, we walked away from Tuesday’s quarter steadfast in our view that Nvidia is an “own it, don’t trade it” stock. Many Wall Street analysts were impressed with the results as well, ushering a flood of price target updates Wednesday. NVDA 1Y mountain Nvidia’s stock performance over the past 12 months. Networking sales The strength in Nvidia’s networking business on display in Tuesday’s print underscored the company’s evolution into a one-stop shop for AI computing in the data center. It’s well-understood that Nvidia has leading GPUs to train AI models, such as viral chatbot ChatGPT , and is rolling out central processing units (CPUs) to help run those models on a day-to-day basis. But its networking business — which sells communications technology to connect different parts of the data center — has become a larger piece of the puzzle. In fact, Nvidia’s networking segment has now surpassed a $10 billion annualized revenue rate, the company said Tuesday. That implies it accounts for roughly 17% of Nvidia’s data-center revenues, according to TD Cowen analysts. In other words, networking has become a significant part of Nvidia’s largest and most important segment. “Networking looks like it is running just as strong, if not stronger, than compute,” Bernstein analysts said in a note Wednesday. Compute refers to sales of GPUs and CPUs. “We believe the networking component of AI is just as important as compute, and oft-overlooked,” the firm said. Nvidia acquired this networking division over three years ago, when it closed a roughly $7 billion takeover of Mellanox Technologies . In a note to clients Wednesday, BMO analysts touted this milestone for the networking business, arguing that “seldom do we see an acquisition work out the way this one has in such short order.” Software sales Nvidia’s software-and-services business is also showing momentum, a sign of its competitiveness in other areas of AI beyond just hardware. The unit is now on track to generate $1 billion in annualized revenue by year-end, management disclosed on the company’s post-earnings conference call Tuesday evening, ahead of an August estimate for hundreds of millions of dollars in annual sales. Sources of this revenue include Nvidia’s DGX Cloud — a supercomputer accessible through a web browser — and AI Enterprise, a suite of software tools for companies to develop and deploy their own AI applications. DGX Cloud was announced in late March. To be sure, software and services is relatively small considering Nvidia expects its companywide revenue to be roughly $20 billion in the three-month period ending in January. But analysts expect the division to keep picking up steam, with Truist estimating the segment will grow to between $2 billion and $3 billion in 2024 and “almost certainly” see growth again in 2025. We look further out on the horizon than that, and can be patient while this higher-margin business matures. Customer base is growing The universe of GPU buyers is expanding, according to management, which bodes well for Nvidia’s ability to continue delivering revenue growth beyond next year. That’s been an emergent concern for investors , who worry Nvidia may eventually see new orders moderate. U.S. cloud-computing providers – Amazon ‘s (AMZN) Web Services, Microsoft ‘s (MSFT) Azure, Alphabet ‘s (GOOGL) Google Cloud and Oracle (ORCL) – are key customers for Nvidia . So, too, are large consumer internet companies like Meta Platforms (META). But Nvidia said Tuesday that a different set of companies is now joining the fray, such as smaller, specialized cloud providers. These companies are, in the words of CEO Jensen Huang, “dedicated to doing really one thing, which is processing AI.” Governments are another type of customer coming on the scene, creating what Nvidia dubbed the “sovereign AI infrastructure market.” The company estimated that market will be a “multibillion-dollar opportunity over the next few years.” (Jim Cramer’s Charitable Trust is long NVDA, AMZN, MSFT, GOOGL, ORCL and META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Nvidia President and CEO Jen-Hsun Huang.
Robert Galbraith | Reuters
Nvidia’s (NVDA) earnings report Tuesday highlighted three themes that the market has underappreciated about the chipmaker — developments that make clear the Club holding can maintain its standing as the world’s chief enabler of artificial intelligence.