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NVIDIA's Data Center Business Is About to Get a Big Boost From Mellanox

By Nicholas Rossolillo - May 26, 2020 at 8:58AM

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Already-impressive momentum is set to look even better.

Long gone are the days of NVIDIA (NVDA -5.26%) the "video game company." In the graphics processing unit (GPU) pioneer's first quarter of fiscal 2021 (the three months ended April 26, 2020), another segment was nearly as large as video games: data centers.

With the long-awaited purchase of Mellanox closing on the first day of Q2, data centers could wind up being the largest reporting segment at NVIDIA from this point forward. Video games will of course continue to play a crucial role -- both for sales and for the technological advancement they help foster for the hardware and software portfolio. But the addition of Mellanox will go down as a pivotal moment for this semiconductor company and its shareholders.

The winds of change continue to blow

Mellanox isn't reported in the numbers yet, but NVIDIA's data center business has nearly caught up with its gaming bread and butter anyway. Building on the strong momentum it had last year, the segment surged 80% higher in the first quarter and was nearly 40% of revenue.

NVIDIA Segment

Q1 2021 Revenue

% of Total Revenue

YOY Growth

Gaming

$1.34 billion

43%

27%

Data center

$1.14 billion

37%

80%

Professional visualization

$307 million

10%

15%

Auto

$155 million

5%

(7%)

OEM and other

$138 million

5%

39%

Data source: NVIDIA.

NVIDIA has been working on the GPU as a computing accelerator for years now, developing the chips to handle specialized tasks like AI and other data-intensive applications. Most of those applications occur in the cloud, a high-growth industry anyway, but it's clear that NVIDIA's wares are picking up serious steam and gobbling up market share.

Even without Mellanox in the mix, the trend is likely to continue. NVIDIA's 2020 GPU Technology Conference (delivered via Alphabet's YouTube this year from CEO Jensen Huang's kitchen) was the focus of multiple cloud and data center hardware releases. The chip designer has built itself into a leader on multiple fronts, and it's going to be difficult for anyone to unseat this innovation engine.

A robotic arm holding an NVIDIA chip.

Image source: Getty Images.

The best is yet to come for data centers

Now add in Mellanox, and NVIDIA's momentum starts to look really epic. Management said the new networking hardware segment will contribute a low-teens percentage to its Q2 total revenue (expected to be $3.65 billion at the midpoint, up 41% from a year ago). That would imply Mellanox's revenue will be no less than $360 million (which jives with Mellanox's revenue and growth trajectory at the end of 2019 just before the takeover). Added to what NVIDIA was already generating on its own, it's looking very likely data centers are the new champion reporting segment for NVIDIA from this point forward, unseating the video gaming segment for the first time.

However, contained in the data center segment are a myriad of other related business lines, like the autonomous vehicle segment, robotics, and AI applications for industries such as healthcare, retail, and manufacturing. Mellanox is an important addition to all of the above. The GPU is helping accelerate specialized computing processes, but computational speed gets bottlenecked and goes to waste if the network the GPU runs on is slow. Mellanox's high-speed networking gear solves that problem, and it will increasingly be bundled with NVIDIA's other hardware to create a more cohesive whole.

After a 53% return in 2020 to date, NVIDIA shares are back to pushing new all-time highs. It's a premium-priced stock, but deservedly so. Mellanox is going to give growth a huge bump in the year ahead and will plug in nicely to what is now the driving force behind this semiconductor leader.

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