NVIDIA (NVDA -0.36%) shareholders heaved a sigh of relief after the company's second-quarter earnings report for fiscal 2020 turned out to be better than expected, though the year-over-year results were poor. The graphics specialist's guidance was also good enough to inspire confidence among investors, as it indicates that business is getting back on track.
NVIDIA expects its revenue to decline by just 9% annually in the third quarter, much better than the 17% decline in the previous quarter. The company attributes this to its new gaming GPUs (graphics processing units), which helped NVIDIA cut its teeth in the high-end graphics card market.
The expected improvement is good news, but investors shouldn't overlook some glaring problems in the chipmaker's latest report.
The data center business has lost steam
NVIDIA's data center business was growing at a roaring pace a year ago. The company's projections indicated that it could clock an annual growth rate of over 70% in the coming years, given the pace at which the market was growing. But things didn't turn out that way. The company's data center revenue fell 14% annually during the second quarter, driven by weak customer spending.
However, this was not the first setback faced by NVIDIA in data centers. Revenue in that segment peaked in Q3 of last fiscal year.
Rival Advanced Micro Devices (AMD -2.22%), on the other hand, has been enjoying terrific momentum in the data center GPU business over the past few quarters. While NVIDIA struggled on this front last quarter, AMD was singing a different tune. AMD CEO Lisa Su remarked on the company's latest conference call, "We had another quarter of strong year-over-year data center GPU sales growth driven largely by HPC [high-performance computing] and cloud wins. We continue making progress expanding this margin-accretive part of our business based on our strategy to focus on working closely with marquee customers."
This is not surprising, as AMD provides a more complete package to data center customers than NVIDIA. The former's server processors have helped it eat into market leader Intel's share. For instance, Google and Twitter recently selected AMD's second-generation EPYC server processors for use in their data centers.
Such contract wins seem to be having a positive impact on AMD's GPU-specific data center business, and at NVIDIA's expense.
Given that demand for data center accelerators, which include GPUs, is increasing at a compound annual growth rate of nearly 50%, according to third-party estimates, NVIDIA seems to be missing out on a big opportunity.
AMD can make further inroads
One of the reasons AMD seems to be gaining over NVIDIA is its move to a more efficient 7-nanometer (nm) manufacturing process. AMD launched processors based on a smaller node process in November of last year, and that seems to have turned the tables in its favor.
AMD will continue enjoying a technological advantage over NVIDIA until next year, when the latter's 7nm chips are expected to come out. So don't be surprised to see NVIDIA's data center business remain under pressure from AMD.
The data center segment is NVIDIA's second-largest source of revenue after gaming, supplying nearly a quarter of the overall top line. So until and unless NVIDIA's data center business steps on the gas once again, it will continue weighing on the company's performance and keep it from making a sustained comeback.