Too many computer hardware companies are cyclical, one-trick ponies forever dependent on making major technological breakthroughs. Computer memory manufacturers like Micron Technology and Seagate Technology Holdings come to mind. Aside from repeated swings from too much production to not enough, the introduction of NAND storage (you typically call them flash drives) set the stage for a brutal competition between the two outfits; the RAM race has been just as difficult.
Not every technology name is subject to the economy's or the sector's cyclical effects, though, nor highly dependent on one particular market. Among the best of the best of these types of tech companies you'll find Nvidia (NVDA -10.01%), which has a hand in a semi-cyclical, high-growth arena as well as in a slower-growth, less-cyclical segment of the graphics processing unit (GPU) market.
Not one, but two big breadwinners
It's a multifaceted company, and yet it's also a highly focused one that can repurpose its very best intellectual property in a lot of different ways. Its different operating segments serve the video gaming market, connected automobiles, computer-based creators and designers in need of powerful visualization solutions, and enterprises operating data centers. It also licenses technology and outright sells GPUs to computer and laptop manufacturers looking to meet consumer demand for high-powered electronics.
There's little doubt as to Nvidia's two biggest and best breadwinners, though. Of last quarter's $6.5 billion in revenue, nearly $3.1 billion of it came from the video gaming market, while almost $2.4 billion worth of hardware was sold to organizations looking to build or upgrade data centers. The former source's sales improved 85% year over year and 11% from first-quarter levels, while the latter saw year-over-year growth of 35% and improved 16% from the first quarter's data center tally. Both extend streaks that took hold in late 2019 (fiscal 2020) and plowed right through the headwinds spurred by the pandemic.
Data source: Nvidia. Chart by author.
Don't look past the healthy balance of Nvidia's revenue mix. The organization has two divisions it can lean on, in good times and bad. The same can't be said of all companies.
Perhaps more important, however, don't look past the differing nature of Nvidia's two biggest business lines.
The best of both worlds
The gaming market is clearly the bigger and higher-growth opportunity, but let's face it: Video gamers can be a fickle bunch. It took 2019's launch of its new GeForce RTX graphics cards to really excite these consumers, and the 2020 debut of second-generation cards based on its Ampere architecture to rekindle that excitement. Coronavirus shutdowns, of course, helped spur that interest.
At the time, the underlying technology could legitimately be considered game-changing for the gaming world. It will take some time for the company to come up with another technological evolution, and gamers are apt to simply stick with their graphics cards until then. That should cool off sales growth from its current clip.
Intel (INTC -2.40%) is also finally getting serious about gaming GPUs, unveiling its so-called Alchemist micro-architecture graphics cards last week for launch sometime in 2022. That will at least make a small dent in Nvidia's gaming card business. For the time being, though, what a growth engine!
Nvidia's supercomputer at the University of Cambridge in England. Image source: Nvidia.
At the other end of the excitement spectrum you'll find Nvidia's data center business. This arm is still ultimately built around graphics processing (the A100 design in particular), but the tech is tweaked for uses that big businesses would care about. This technology is particularly well suited for artificial intelligence applications and supercomputing.
It's boring stuff. It's also not a high-octane growth arena. Information-technology market researcher Gartner believes the data-center infrastructure market will only grow about 6% this year, and that's after a COVID-crimped 2020. Gartner expects data-center spending growth to cool to a pace of only 3.4% next year.
The market is expected to keep growing at a snail's pace at least through 2024, however, and Nvidia is positioned to plug into more than its fair share of that. Bank of America analyst Vivek Arya estimates the company's data center revenue could grow at an annualized clip of 30% or more for several years.
The bottom line
It's still a technology stock, to be clear. Even though its businesses are relatively well shielded from cyclical headwinds, sometimes tech stocks as a group fall out of favor. It would also be naive to presume that Nvidia can't falter on research and development or supply planning. It's a for-profit technology player, which imposes at least some degree of risk that's currently bolstered by the fact that shares are up more than 50% just since mid-May.
By most technology stock standards, though, this is a well-balanced one in terms of risk, reward, reliability, and predictability. And a decent pullback is (still) an entry opportunity for long-term investors.
