Analysis: NVDA

It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things. - Leonardo da Vinci

Nvidia (NVDA) on Wednesday, after the closing bell, showed everyone that the company is doing anything but sitting back, reporting a strong top- and bottom-line beat with its fiscal fourth quarter 2021 results.

On the top line, revenue of $5.0 billion (+61% YoY) outpaced the $4.82 billion consensus with both the Gaming and Data Center platforms reaching record revenues for both the quarter and year. On the bottom line, adjusted earnings per share of $3.10 (+64% YoY) exceeded expectations of $2.81 per share.

On the margin front, Nvidia's adjusted gross margin came in at 65.5%, representing an expansion of 10 basis points over the prior year (flat sequentially). This result was also slightly higher than the 65.3% consensus forecasts.

"Q4 was another record quarter, capping a breakout year for Nvidia's computing platforms," Nvidia's founder and CEO Jensen Huang said. "Our pioneering work in accelerated computing has led to gaming becoming the world's most popular entertainment, to supercomputing being democratized for all researchers, and to AI emerging as the most important force in technology. Demand for GeForce RTX 30 Series GPUs is incredible. NVIDIA RTX has started a major upgrade cycle as gamers jump to ray tracing, DLSS and AI. Our A100 universal AI data center GPUs are ramping strongly across cloud-service providers and vertical industries."

Huang added that thousands of companies across the world are applying Nvidia's artificial intelligence to create cloud-connected products with artificial intelligence services that will transform the world's largest industries.

"We are seeing the smartphone moment for every industry," said Huang, noting that the Mellanox deal has expanded the company's footprint across the data center.

In addition, Huang, said, "good progress" is being made toward acquiring Arm. 

By Reportable segments, Graphics revenue was $3.056 billion (+47% YoY; +10% QoQ) while Compute & Networking revenue was $1.947 billion (+91% YoY; roughly flat QoQ)

By platform, Gaming revenue was $2.495 billion (+67% YoY; +10% QoQ), higher than consensus of $2.358 billion. 

"Demand is incredible for our new GeForce RTX 30 series products based on the Nvidia Ampere GPU architecture," CFO Colette Kress commented on the call. Speaking to the incredible demand for this new generation of chips, Kress added, "the entire 30 series lineup has been hard to keep in stock, and we exited Q4 with channel inventories even lower than when we started. Although we are increasing supply, channel inventories will likely remain low throughout Q1."

Kress also noted that while the team can't accurately track the end use of their chips, it suspects that crypto mining demand contributed $100 million to $300 million of fourth-quarter gaming revenue. The presence of the mining dynamic is something we will be keeping an eye as it could result in Ethereum prices impacting the stocks price action. That said, this is why the team recently announced a chip specifically designed for crypto mining.

Kress said on the call that the introduction of these chips in March will help the team "gain some visibility into the contribution of "cryptomining," a factor that should help mitigate the mining dynamic that plagued the company back in 2018 -- the last time we saw a boom in crypto mining activity.

Looking ahead, the team expects these new cryptomining processors (CMPs) will contribute approximately $50 million in sales to industrial miners in Q1 and management noted that they will "quantify their contribution each quarter for transparency."

It's also worth adding that while Huang expects mining to be a part of the company's business going forward given what he believes are "increased signs of staying power." He was quick to note that it will not likely become an extremely large piece of the puzzle. This is because as the space grows, specialized ASIC makers will start entering the market -- as we saw with bitcoin -- and soften the impact. Additionally, when the market demand is smaller, at a level where ASIC makers can't sustain the R&D, the team will simply create CMPs. We believe this to be a perfect way for the company to benefit from "booms" in mining demand, without exposing itself too much to the "busts," as they can partition the impact and provide increased transparency for investors.

Additionally, since these CMPs don't work for gaming, it helps to prevent a flood in the used gaming chips market when that "bust" does occur.

Nvidia reported Data Center revenue of $1.9 billion (+97% YoY, flat QoQ), edging expectations of $1.841 billion consensus (note that the Mellanox was not included in the prior years' numbers). On the call, management commented that "vertical industries were well over 50% of Data Center revenue across compute and networking, with particular strength in supercomputing, financial services, higher education and consumer Internet verticals. Additionally, hyperscale customers continue to deploy the A100, driving both sequential growth and exceptionally strong year-on-year growth in Data Center compute. The A100 has been adopted by all major cloud customers globally and is being deployed by hyperscale customers for internal workloads. Still, we are in the early stages of adoption and expect continued growth this year. The ramp of the A100 has been smoother and accomplished by better visibility than prior generation."

It was another strong quarter for Mellanox sales, advancing 30% annually (from CY4Q19, when Mellanox was still a stand-alone quarter), led by hyperscale and large consumer internet customers, which grew over 60% from last year, with several contributing record revenues.

While sales were down sequentially, as expected, the team sees sequential growth returning in the first quarter.

Professional Visualization revenue came in at $307 million (-7% YoY; +30% QoQ) and beat expectations of $265 million. On the call, management noted that "strong sequential growth was driven primarily by a recovery in desktop workstations as some customers returned to the office and enterprises resumed purchases that have been deferred by the pandemic.

Notebook GPUs grew sequentially to a record, as enterprises continue to support remote workforce initiatives. Looking ahead, while the team expects business reopening to benefit desktop workstation, it believes that longer-term workforce trends like remote work will be more beneficial for the notebook GPU business and cloud offerings.

Automotive revenues of $145 million (-11% YoY; +16% QoQ), topped expectations of $139 million. Sequentially, "growth was driven by continued recovery in the global automotive production volumes and growth in AI cockpit revenue," while annually, the decline reflected the "expected ramp down of legacy infotainment."

Lastly, OEM and other revenue was $153 million (+1% YoY; -21% QoQ). It came in below expectations of $170 million, with the sequential decline resulting from "lower volume of entry-level laptop GPUs."

The print was great, but the guidance is the real kicker. For the fiscal first quarter, management expects revenue to be $5.3 billion +/-2%, and that is way stronger than the $4.494 billion consensus estimate. As for margins, management expects adjusted gross margins for fiscal first quarter 2022 to be about 66.0% +/- 50bps, well above the 64.7% consensus heading into the print. Adjusted operating expenses are expected to be approximately $1.2 billion and capital expenditures are expected to be between approximately $300 million and $325 million "including principal payments on property and equipment."

Elsewhere, adjusted other expenses are expected to be approximately $50 million, and the adjusted tax rate is expected to be about 10% +/- 1 percentage point.

Regarding the pending acquisition of Arm from Softbank, management said the "process is moving forward as expected" and that it's confident that regulators will see the benefits of the deal. While some industry peers have pushed back on the move, Nvidia believes that the "combination will spur competition" and that with Arm, the combined entity will "provide greater choice to the data center ecosystem, a compelling alternative CPU architecture for the market and further enhance Arm's offering in mobile and embedded."

Importantly, serving to address concerns regarding competition, the team was also sure to note that they "love and intend to maintain Arm's open licensing model."

That model would also be part of a commitment guaranteed both by long-term legally binding contracts as well as Nvidia's own interest in ensuring this investment is a profitable, according to the company.

All in, these were fantastic results that were compounded by better-than-expected guidance. While we believe some of the after-hours weakness to be a combination of profit-taking (shares were up around 11% year-to-date coming into the release) and perhaps concerns that crypto mining is providing a temporary boost to sales, our focus is on the incredible momentum of the core business and believe that management's decision to release a mining-oriented chips will help mitigate the impact of crypto market volatility. Be it in gaming or the data center, demand is outpacing supply, however, management is working closely with its data center customers and believes that with proper planning the demand will be met.

Once again, as we listened to the conference call, we were stunned by management's vision of the future and believe that Nvidia has exposure to some of the most powerful secular-growth end markets in the world. Whether it's gaming, cloud computing, artificial intelligence, inferencing, autonomous driving, or pro visualization, Nvidia is at the heart of the trend. While the company is already a powerhouse, we believe that the addition of Arm Holdings will only add to this incredible company and further cement the company's future growth opportunities.

Make no mistake, regardless of the after-hours action, the move toward digitization cloud computing and decentralized operations has been accelerated by the pandemic and Nvidia has been and will continue to be a key beneficiary.

Last quarter and the quarter before that, shares were met with after-hours selling (and how did that work out for the sellers?). So, as we said then, we would not sell this stock on this release and will look for an opportunistic pullback to upgrade our rating back to a "ONE."

Lastly, we encourage everyone to read the Nvidia conference call, but we will leave members with Huang's closing remarks:

"Q4 capped a truly breakout year for Nvidia. The two biggest engines of our business, Gaming and Data Center, posted powerful growth. Gaming has become the world's largest media and entertainment industry and will grow to be much larger. And again gamers will create, will play, they'll learn, they'll connect, the medium of gaming can host any type of game and eventually evolve into countless metaverses, some for play, some for work. Gaining a simultaneously a great technology and a great business driver for our company."

"This year, we also closed our Mellanox acquisition and successfully united the amazing talent of our companies. Combined, we possess deep expertise in all aspects of computing and networking to drive the architecture of modern data centers. Cloud computing and hyperscalers have transformed the data center into the new unit of computing. Chips and servers are just elements of the data center scale computers now. With our expertise in AI computing, full-stack accelerated computing, our deep network to computing expertise and cloud-to-edge platforms, NVIDIA is helping to drive a great computer industry transformation. And our planned acquisition of Arm, the world most popular and energy-efficient CPU company, will help position NVIDIA to lead in the age of AI."

"This year was extraordinary. The pandemic will pass, but the world has been changed forever. Technology adoption is accelerating across every industry. Companies and products need to be more remote and autonomous. This will drive data centers, AI and robotics. This underlies the accelerated adoption of Nvidia's technology, the urgency to digitize, automate and accelerate innovation has never been higher. We are ready. We look forward to updating you on our progress next quarter. Thanks a lot."

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long on NVDA.