The data center business has played a critical role in NVIDIA's (NVDA 2.33%) terrific rally so far in 2020, but investors were left wanting more from this segment when the tech giant released its third-quarter results for fiscal 2021 in mid-November.
Though NVIDIA's results showed spectacular growth once again, the data center business underwhelmed as compared to Wall Street's expectations. The graphics specialist pointed out that the data center business will witness a slight contraction in revenue this quarter thanks to a "meaningful sequential revenue decline" from sales of Mellanox's products, a company that NVIDIA had acquired earlier this year.
But investors shouldn't be worried about this blip, as NVIDIA's data center business is in solid shape and seems destined for long-term growth. Let's see why.
No reason to worry
There isn't much reason to be alarmed about NVIDIA's data center business despite Wall Street's apparent concerns. Revenue from this segment jumped a whopping 162% year over year to $1.9 billion in NVIDIA's fiscal Q3 of 2021, accounting for just over 40% of its total revenue.
Mellanox accounted for nearly a third of the data center segment's revenue and 13% of the company's total revenue of $4.72 billion, which means that its contribution stood at $615 million. Excluding Mellanox, NVIDIA's data center business generated $1.28 billion in revenue, an increase of nearly 77% over the prior-year period.
Now, NVIDIA has warned that the data center business' sequential growth would take a hit this quarter since Mellanox's fiscal third-quarter sales included shipments to a Chinese customer. Mellanox won't be shipping products to that customer in the ongoing quarter, but NVIDIA still anticipates 30% year-over-year growth in sales from its newly acquired division this quarter.
Moreover, the fact that NVIDIA's fiscal fourth-quarter revenue is anticipated to increase 54% over the prior-year period to $4.8 billion further indicates that concerns about the data center business' underwhelming performance are overblown. Such growth wouldn't have been possible without a strong showing from the data center segment that moved the needle in a big way for NVIDIA.
More importantly, it won't be surprising to see NVIDIA's data center growth hit a higher gear, as it is sitting on a bunch of lucrative catalysts.
NVIDIA's data center business has abundant tailwinds
NVIDIA's move to the Ampere GPU (graphics processing unit) architecture is helping the company deliver a big bump in performance via its data center-oriented graphics cards. Earlier this year, the chipmaker had announced the Ampere-based A100 data center GPU that was quickly adopted by major cloud service providers.
And now, the company has brought out a more powerful version of that card that packs double the memory. The new A100 GPU sports 80 GB of memory as compared to the previous version's 40 GB, which makes it better equipped to tackle artificial intelligence (AI), analytics, and high-performance computing (HPC) workloads.
The cloud HPC market is a fast-growing space that's reportedly clocking a compound annual growth rate (CAGR) of 21%, as per third-party estimates. Similarly, the cloud AI market is anticipated to grow more than 20% a year through 2025, as per Mordor Intelligence estimates. As a result, demand for workload accelerators such as graphics cards is expected to grow by leaps and bounds in the future.
Private investment firm Ark Invest predicted two years ago that the data center accelerator market could grow tenfold over the next decade. NVIDIA could win big from this trend because GPUs are the dominant chip type in the accelerator space as compared to CPUs (central processing units), and the graphics specialist has already built a solid position for itself in this space.
For instance, a study in May 2019 revealed that the top four infrastructure-as-a-service (IaaS) computing providers -- Amazon Web Services, Microsoft Azure, Google Cloud Platform, and Alibaba Cloud -- were using NVIDIA GPUs in 97.4% of their instance types. A cloud instance refers to a virtual server in a cloud computing environment.
Sustainable growth worth investing in
The bottom line is that NVIDIA is dominating a fast-growing market that could add billions to its revenue in the long run. The data center accelerator market is expected to generate more than $21 billion in annual revenue by 2023, per third-party estimates.
So, investors shouldn't be worried about NVIDIA's data center prospects; they are in solid shape right now. Moreover, NVIDIA's data center business seems capable of sustaining high growth rates in the future and playing an important role in helping the graphics specialist remain a top growth stock since it supplies a big chunk of its revenue.