AI Continues to Drive NVIDIA's Staggering Growth

NVIDIA Corporation's (NVDA 0.76%) operational and financial execution over the past several years has been nothing short of exemplary. While the company's results continue to confound the naysayers, the stock has exploded, up nearly tenfold in the past three years. Even in the face of spectacular results last quarter, some investors sold off the stock, fearing this record of staggering growth couldn't continue. They were wrong.

For the just completed third quarter, NVIDIA produced a record $2.64 billion in revenue, up 31.5% year over year, obliterating both the company's own forecast for $2.35 billion and the consensus estimate of $2.36 billion.

Gaming is the present, but AI is the future for NVIDIA. Image source: NVIDIA.

NVIDIA's gaming segment continued to be a rock-solid performer, with sales of $1.56 billion, up 25% year over year and accounted for 59% of the company's total revenue.

GAAP net income grew to $833 million, up 55% year over year, resulting in record earnings per share of $1.33, again smashing expectations, as analysts had been anticipating earnings of $0.94 per share.

The intelligence is artificial, but the revenue is real

NVIDIA is the leader in chipsets used for artificial intelligence (AI), and that was again on full display. Revenue from the company's data-center segment, where AI sales are contained, more than doubled to $501 million, up 109% over $240 million produced in the prior-year quarter.

This was the ninth consecutive quarter of sequential increases in the segment, and the sixth consecutive quarter of triple-digit year-over-year gains. In the closing remarks of the earnings conference call, founder and CEO Jensen Huang focused on the opportunity AI presents:

AI is becoming increasingly widespread in many industries throughout the world, and we're hoping to lead the way with all major cloud providers and computer makers moving to deploy Volta, and we're building the future of autonomous driving. We expect robot taxis using our technology to hit the road in just a couple of years. 

DATA SOURCE: NVIDIA 10-K. CHART BY AUTHOR. ALL FIGURES IN MILLIONS. YOY = YEAR OVER YEAR.

Driver's seat

While revenue from the auto segment produced a relatively small 13% year-over-year increase, the segment still has a long runway. When asked on the conference call about the potential for self-driving cars, Huang pointed out the long lead time from research to implementation. He theorized that large numbers of the development systems for simulation environments would be sold in the coming year, with widespread adoption of robot taxis coming in the following year, and fully autonomous vehicles hitting the road sometime between 2020 and 2021. 

NVIDIA views this as an incredible opportunity, with the potential to realize several thousand dollars in revenue for each self-driving car outfitted with the company's processors.

Looking ahead

NVIDIA continues to invest nearly 18% of its revenue into research and development, to maintain its leadership position in both gaming and the nascent AI market.

The company announced a 7% increase in its quarterly dividend to $0.15 per share. With a minuscule 0.25% dividend yield and a lowly 13% payout ratio, the company will have plenty of opportunities to increase the dividend in the future, though its current priority is clearly growing. 

NVIDIA expects revenue of $2.65 billion in the fourth quarter, which would represent a year-over-year increase of 22%, though the company has a history of conservative guidance. Growth of that magnitude, while still laudable, would be significantly slower than what investors have seen lately, but it will become increasingly more difficult to produce the type of gains seen lately because of difficult year-over-over comps.

As AI becomes more and more pervasive, NVIDIA continues to be the industry standard and is set to reap the gains from its early entrance into the field.