NVIDIA's (NASDAQ:NVDA) business turned in impressive numbers for the fiscal first quarter. Overall, revenue climbed 39% year over year, as data center customers continue buying NVIDIA processors to facilitate high-performance computing and artificial intelligence training workloads. NVIDIA just launched the A100 chip for data centers, which contributed to strong demand last quarter.
Gaming was also strong, with revenue up 27% year over year. Despite the faster rate of growth from the data center business, selling graphics cards to gamers is still NVIDIA's largest business, and CEO Jensen Huang believes the shift toward remote work, which accelerated around COVID-19, could fuel growing demand for gaming chips long after the pandemic is over.
Here are three catalysts that should drive continued demand for NVIDIA's chips.
1. Cloud infrastructure spending
After a temporary slowdown for most of calendar 2019, demand for data-center chips has roared back in the last two quarters. Revenue crossed $1 billion for the first time and increased 80% over the year-ago quarter, driven by strong demand from cloud computing customers.
NVIDIA's data center business has got an enormous tailwind behind it. The latest data from Synergy Research Group showed no slowdown in cloud infrastructure spending during the first quarter despite the pandemic. Spending on cloud infrastructure services grew 37% year over year to reach $29 billion, which is an annual run rate of over $100 billion.
NVIDIA is one of the top vendors for high-powered graphics processors that are powering the largest cloud services in the world. The more money that gets spent on cloud infrastructure, the higher the ceiling for NVIDIA's data center business in the long run.
2. Strong gaming demand
Huang sees a permanent trend taking shape with remote work becoming more common following the COVID-19 pandemic, and that means more opportunities for people to play video games.
"There is a strong movement of those companies that are going to support a larger percentage of people working from home," Huang said. "And when people are working from home it's going to clearly increase the single best home entertainment, which is video games."
The gaming segment made up 51% of NVIDIA's total revenue in fiscal 2020. Gaming was already a strong business for NVIDIA before the shelter-in-place period last quarter, with gaming revenue surging 56% year over year in the fiscal fourth quarter. But with more people at home, NVIDIA saw the fastest growth in gaming laptop sales in six quarters.
The upcoming release of a potential game-of-the-year winner, Cyberpunk 2077, should stimulate further demand for gaming processor cards later this year, as CFO Colette Kress explained.
"The value and momentum of our RTX GPUs continue to grow," she said. "We have a significant upgrade opportunity over the next year with the rising tide of RTX enabled games, including major blockbusters like Minecraft and Cyberpunk."
3. Mellanox deal brings significant benefits
With so much growth happening in cloud services, there has been plenty of deal-making happening in the data center market. NVIDIA recently closed the acquisition of Mellanox, a provider of cables, switches, and software for data centers. Mellanox revenue soared 40% year over year in the first quarter.
Growth in the data center segment helped push NVIDIA's non-GAAP gross margin to 65.8% in the last quarter. Mellanox has a similar margin profile to NVIDIA's data center business, so management is calling for the addition of Mellanox to be immediately accretive to NVIDIA's gross margin, EPS, and free cash flow.
The outlook for the fiscal second quarter, including the first full quarter of Mellanox, calls for non-GAAP gross margin to improve to 66%, a new all-time high for NVIDIA. Revenue is expected to increase 41.5% year over year to $3.65 billion, plus or minus 2%, with Mellanox contributing a low-teens percentage to total revenue.
NVIDIA doesn't give specific earnings guidance, but analysts expect EPS to increase 59% year over year to reach $1.97 in the fiscal second quarter.
With Mellanox, NVIDIA can now generate revenue from both the computing side and networking side of the data center. "This is the era of data center scale computing and together, NVIDIA and Mellanox can architect end-to-end," Huang said.
These three catalysts should lead to strong growth through the rest of this year. Beyond the near term, NVIDIA still looks like a good bet. Obviously, demand coming from data centers is not going away anytime soon. Additionally, NVIDIA continues to hold a leadership position in the discrete graphics card market ahead of Advanced Micro Devices. With new games designed to take advantage of enhanced graphics capabilities over the next five years, there should be plenty of demand for NVIDIA's gaming cards.