There was a lot to like about NVIDIA's (NVDA -2.81%) second-quarter financial report, though you might not think so based on how investors reacted. The stock fell in response to weak guidance, even in the face of a better-than-expected quarter, as NVIDIA called an end to the cryptocurrency boom.
NVIDIA reported sales of $3.12 billion, up 40% year over year, and earnings per share of $1.76, up 91% compared with the prior-year quarter. This was enough to top analysts' consensus estimates, which called for revenue of $3.11 billion and earnings per share of $1.66.
While the stock sold off, management gave investors plenty of reasons to be excited about the company's future.
While some have worried that sales related to artificial intelligence (AI) would slow significantly, NVIDIA CEO Jen-Hsun Huang believes that it still represents a substantial opportunity for the company. He said that while AI wasn't the largest contributor, "I believe it's going to be a very large segment of our data center business." He went on to say that "industry after industry after industry" was discovering the benefits of AI, and that NVIDIA would "help customers speed AI deployment from months to days or even hours, with highly integrated, optimized solutions."
Additionally, NVIDIA is seeing even greater adoption of its AI by cloud providers that are in turn offering it as a service to their customers.
The changing transportation landscape
Huang pointed to the ongoing evolution in the transportation industry as one massive opportunity, specifically laying out the cases of ride-hailing and self-driving cars. Ride-hailing platforms have to decide which vehicle to dispatch and to which passenger, and the computing power necessary to optimize this will continue to grow over time. Self-driving cars will be a large and growing catalyst. Here's how Huang described it:
Every single car company that's working on robot taxis or self-driving cars needs to collect data, label data, train a neural network -- or train a whole bunch of neural networks ... make your list of how many people are actually building self-driving cars ... and every single one of them will need even more GPU accelerated servers.
Huang has previously stated that he believes driverless taxis will start going to market sometime next year, and self-driving cars will be available to the public beginning in 2020 and 2021.
Most important innovation in more than a decade
Many investors have likely never heard of ray-tracing, but it's a term NVIDIA shareholders will want to understand. A little background will help set the stage.
Computer-generated imagery (CGI) is a widely used technique used to create or augment scenes in movies, television shows, and video games. As anyone who has ever watched a CGI movie can attest, the technology has its limitations, the most glaring of which is the difficulty in re-creating the way light acts in the real world.
NVIDIA revealed its new ray-tracing technology back in March, calling it the "definitive solution for realistic and lifelike lighting, reflections, and shadows ... with realistic optical calculations that replicate the way light behaves in the real world, delivering more lifelike images."
Earlier this week, NVIDIA unveiled its Turing Quadro RTX line -- three new ray-tracing processors that will be available in the fourth quarter. During the call Huang said, "Turing is our most important innovation since the invention of the ... GPU, over a decade ago."
When laying out the two biggest benefits NVIDIA will see from its new ray-tracing technology, Huang first pointed to the visualization market, saying it's "never been served" by GPUs before, opening up a whole new market. He then made a cryptic statement, saying, "The second area where you're going to see the benefits of ray-tracing -- we haven't announced."
That theme continued several times throughout the call. In his closing comments, Huang said, "Stay tuned as we unfold the exciting RTX story." Many believe this points to a pending announcement of a consumer-facing version of the technology at NVIDIA's Gamescom conference later this month.
What this all means
The common thread that weaves its way through these discussions is how NVIDIA continues to innovate. In the second quarter, the company spent nearly 19% of its revenue on research and development in order to maintain its industry-leading edge.
It also shows that NVIDIA is playing the long game -- and the ultimate winners will be the shareholders.