Nvidia (NVDA 3.71%) just hit another earnings report out of the park. Second-quarter fiscal 2022 revenue handily topped management's own forecast and was up 68% year over year. The party should continue into Q3 -- Nvidia expects a 44% year-over-year increase in sales at the midpoint of guidance. That's especially impressive considering sales were up 57% during the third quarter of last year. As expected, video game and data center revenue is leading the charge.
Some investors had been worried the drubbing cryptocurrencies like Bitcoin (BTC 0.08%) and Ethereum (ETH -0.57%) took this past spring would upend Nvidia's progress, but that didn't happen. This is not the 2018 Nvidia that suffered when cryptocurrencies took a plunge. A sudden slump in sales of chips to crypto miners this year is not going to take the company down. There are two primary reasons why.
Image source: Getty Images
Nvidia made product changes addressing cryptocurrencies
Early in 2021, Nvidia took some steps to address a "problem" years in the making: Graphics processing units (GPUs) are coveted not just by gamers, but also by crypto miners (mining is the process by which cryptocurrencies are created and managed). To ensure its new GPUs designed specifically with high-end video games in mind ended up in the hands of actual gamers, Nvidia started embedding an algorithm that cuts the hash rate (a unit of measure for the calculations performed during mining) when it detects crypto mining.
Concurrently with that change, Nvidia also released its CMP line of chips designed specifically for mining. This product adjustment would help with supply constraints of its top-of-the-line GPUs for video games, and it would help both gamers and miners get the hardware they desired. During the Q1 earnings call this past spring, CFO Colette Kress had said to expect a whopping $400 million in CMP sales alone. For context, gaming-specific sales were $2.76 billion in the first quarter, but it remained unclear how much of that was due to miners scooping up GPUs.
While the product lineup adjustments were a great move, Nvidia just said on the latest earnings call it's still unclear just how much of its video game segment revenue came from mining. But one thing is certain: The most recent cryptocurrency sell-off this past spring didn't put much of a dent in gaming momentum. Gaming revenue was $3.06 billion in Q2. Adding to the evidence that the lion's share of these GPUs are in fact going to gamers, Kress said CMP sales were only $266 million in the second quarter, far below its expectation for $400 million. Additionally, Kress said to expect "a minimal contribution from CMP going forward." In other words, even though mining is on the wane right now, the gaming segment still notched an 11% sequential gain in Q2 and is expected to grow again in the third quarter.
Clearly, mining profitability has taken a hit since cryptos have fallen from all-time highs earlier this year, and that is impacting parts of Nvidia's business. However, it isn't slowing down the company that much as a world's worth of gamers updates their rigs with new GPUs. Kress said the number of global esports participants is fast approaching half a billion people. Video games are big business these days, and Nvidia has a commanding lead on this front. A temporary slowdown in cryptocurrency mining isn't going to change that.
The data center business is far larger than it was in 2018
Crypto miners aren't the only non-gaming end market demanding GPUs. Data centers -- the computing units that form the backbone of cloud computing -- are also ramping up their use of GPUs, putting them to work as computing accelerators to handle complex workloads and applications like artificial intelligence (AI).
Nvidia has had a flurry of innovation on this front in recent years, unleashing a slew of new chips designed for these data center customers. It also made the acquisition of networking hardware company Mellanox early last year to bolster this emerging area of expertise. As a result, the data center segment hauled in $2.37 billion in sales in Q2 and has been steadily catching up to the gaming unit in size.
For comparison, when the crypto crash of 2018 sent Nvidia sliding backwards (during Nvidia's fiscal 2019), data centers represented only about one-quarter of total revenue. They now account for more than one-third of the total.
Nvidia is only just getting started on this front, too. Some of its more recent hardware announcements for data centers haven't even begun to be commercialized yet (like its Grace central processing units that integrate directly with its GPUs). This is a huge segment of the semiconductor industry that has long been dominated by Intel. Tens of billions in annual sales are up for grabs if Nvidia's innovations can continue to steadily garner momentum.
Long story short, Nvidia's data center segment is a much larger part of its business than it was a few years ago, and it's picking up steam -- especially as it starts to add cloud computing software services into the mix as well. Fears that the crypto market downturn from this past spring would decimate Nvidia again were overblown. Granted, another uptick in crypto activity would help, but it isn't a primary catalyst for this chip designer. This is the best long-term semiconductor investment around, as it benefits from multiple secular growth trends in the global economy.
