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Gaming and Artificial Intelligence Take Center Stage for NVIDIA

By Chris Neiger – Updated Aug 24, 2018 at 2:40PM

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The company is still firing on all cylinders, even if investors were disappointed with its third-quarter outlook.

Graphics processor maker NVIDIA Corporation (NVDA 1.96%) recently reported its second-quarter fiscal 2019 results, with some fantastic outcomes. The company's total sales were up 40% from the year-ago quarter to $3.12 billion, which outpaced analysts' consensus estimate of $3.10 billion. NVIDIA's earnings of $1.76 per share also surpassed Wall Street's expectations of $1.66 per share and were up 91% year over year.

Management has done a fantastic job of growing the company's top line, and the second quarter was no exception -- sales from the company's data center, gaming, professional visualization, and automotive segments all set records. 

To understand NVIDIA's growth and what investors can expect in the months ahead, we have to look beyond the numbers, though. So let's dig into what management said during the earnings call to get a better understanding of why two of the company's key businesses -- data centers and gaming -- are growing and what the company expects in the near term.

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Image source: Getty Images.

AI inference is helping drive data center growth

NVIDIA has enjoyed multiple bright spots in its business over the past few years, but one of the best ones has been the company's fast-growing data center sales. In the second quarter, revenue from the segment jumped nearly 83% from a year ago and now accounts for 24% of the top line -- up from 10.5% just two years ago.

While there may be several reasons data center sales are growing quickly, NVIDIA's CFO Colette Kress spent significant time on the call highlighting the contribution that artificial intelligence inference systems (which help AI servers complete speech and image-recognition services) have had on the segment.

"We continue to gain traction with AI inference solution, which helped expand our addressable market in the data center," Kress said, and she added that the company's release of a new AI inference software (called TensorRT 4) in the second quarter will help the company "address a much larger portion of deep learning inference workloads, delivering up to 190 times performance speed-up, relative to CPUs."

CEO Jensen Huang said that his company has been laying the groundwork for AI inference for several years, and while it isn't the company's largest data center business right now, its importance is growing quickly.

"Inference is going to be a very large market for us. It is surely material now in our data center business. It's not the largest segment, but I believe it's going to be a very large segment of our data center business."

Keeping tabs on AI and its effect on the company's data center business is important for investors, because NVIDIA's leadership believes its total addressable market in the data center space will be $50 billion in the coming years.

Gaming sales are experiencing continued momentum

NVIDIA earns about 58% of its total revenue from its gaming segment, by far the company's most significant sales driver, and in the second quarter, the company improved gaming revenue 52% year over year.

The spike in sales was due partly to demand for back-to-school computers and partly to the growing gaming market, management said.

"Growth was driven by all segments of the business with desktop, notebook, and gaming consoles up, all strong double-digit percentages year-on-year," Kress said. She added that "The gaming industry remains vibrant. The esports audience now approaches 400 million, up 18% over the past year," and mentioned that popular games like Fortnite have helped the industry.

Kress also mentioned that the company's recently announced Turing architecture would bring new levels of gaming and be foundational to the company's gaming future.

"Turing is our most important innovation since the invention of the CUDA GPU over a decade ago," she said, adding, "This new architecture will be the foundation of a new portfolio of products across our platforms going forward."

And Huang said on the call later that

Turing is a reinvention of computer graphics. It is the first ray-tracing GPU in the world. It's the first GPU that will be able to ray trace light in an environment and create photorealistic shadows and reflections and be able to model things like area lights and global illumination and indirect lighting. But the images are going to be so subtle and so beautiful, it -- when you look at it, it just looks like a movie.

NVIDIA is already a leader in the graphics processor space, and the company's sales performance in the second quarter, along with the announcement of Turing, should help keep the company in the top spot.

Third-quarter expectations need adjustment

While NVIDIA posted solid results, investors were disappointed with the company's third-quarter guidance.

Kress said on the call that "We expect revenue to be $3.25 billion, plus or minus 2%," but that fell just short of Wall Street's prediction that NVIDIA will deliver $3.24 billion in the third quarter.

Part of the shortfall may come from the fact that the company isn't including cryptocurrency in its quarterly outlook anymore. "We are including no contribution from crypto in our outlook," Kress said.

Huang said that the company initially thought sales from graphics processing units (GPUs) for cryptocurrency would have had a bigger impact on its business:

In the beginning of the year, we thought, and we projected that crypto would be a larger contribution through the rest of the year, but at this time, we consider it to be immaterial for the second half. And so that makes comparisons on a sequential basis on, I guess, a quarterly sequential basis harder. But on a year-to-year basis, I think we're doing terrific.

Keep this in mind

Despite investors' temporary disappointment with the third-quarter outlook -- the stock has since recovered from the post-earnings dip -- Huang remains optimistic. "And so I think we're in a great position, and I'm looking forward to reporting Q3 when the time comes," he said.

And Huang has lots of reasons to be optimistic. His company's record revenue across all of its business segments shows that NVIDIA knows how to continue dominating in its core gaming segment while growing its opportunities in data centers and other businesses. Additionally, the company's launch of its new Turing architecture means that it's likely to keep its dominant position in one of its key markets for years to come.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.

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