Beyond the broader tech sell-off, investors in computer giant Nvidia (NVDA -3.33%) have had mixed feelings in February. An $80 billion bid to acquire a chipmaker called Arm Semiconductor from SoftBank was terminated due to regulatory challenges.
But Nvidia's fourth-quarter and fiscal year 2022 results released on Feb. 16 were impressive across the board and demonstrate the company has a bright future even without this deal. Shareholders still have a lot to love about Nvidia and its future.
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The omniverse is an arm's length away
The proposed Arm deal was intended to help Nvidia move beyond its graphics processing unit (GPU) business by focusing on high-performance computing and artificial intelligence (AI).Nvidia wants to become the leader in accelerated computing, and the core thesis of the Arm deal was to deliver on its three-chip strategy of graphics processing, data processing, and central processing. Accelerated computing is a term that encompasses several different workflows, including connected products, industrial automation, and robotics. Nvidia has come to define this concept as the omniverse, an interactive way to capture spatial models or renderings in real-time.
These capabilities would be incredibly valuable for tech and industrial businesses like automakers that design factories and robotics. In the omniverse, workers can connect in a single, interactive environment to collaborate more efficiently. Despite being in the early innings of the omniverse, Nvidia has integrated its applications into end markets including architecture, manufacturing, media and entertainment, and game development. Early adopters include Cisco, Disney-owned Pixar Studios, and Adobe.
These initial successes, along with strong financial performance have driven Nvidia's stock over 60% during the last 12 months. But a week before its most recent earnings report, shareholders learned that the company called off the proposed Arm acquisition due to antitrust concerns from regulators. The stock price fell by 3% but rebounded later in the day.
Gaming is quickly becoming a large force
Nvidia's business is captured by two primary segments: graphics and computer networking. These segments are broken out into five market platforms: gaming, data centers, professional virtualization, automotive and robotics, and original equipment manufacturing.
For the fiscal year 2022 which ended Jan. 31, 2022, Nvidia generated $26.9 billion in total revenue, which represented a 61% year-over-year increase. The gaming unit generated $12.5 billion in revenue, up 61% year over year, and accounted for 46% of the company's total revenue.
Nvidia has not been immune to supply chain disruptions and experienced decreased inventory levels, ending fiscal year 2022 with $2.6 billion in inventory, up from $1.8 billion the year prior. Nvidia CFO Colette Kress said, "Outstanding inventory purchase and long-term supply obligations were $9.0 billion, up from $2.5 billion a year ago and up from $6.90 billion a quarter ago, due to longer lead-times throughout the supply chain."
Regardless, the impressive growth in the gaming unit was driven by strong consumer demand for its architecture products and GPUs. Although supply chain disruptions may cause near-term turbulence, demand for Nvidia's products remains strong.
Don't underestimate the tailwinds from big data
Another exciting growth area for Nvidia is hyperscale data centers, which are much larger than traditional data centers and tend to outperform them given the amount of data and storage services they can process.
Companies like Amazon, Google, Microsoft, Snowflake, and Palantir are all contributing to the rising corporate demand for hosting data in the cloud and synthesizing the data to drive business results. When it comes to cloud computing, Nvidia is integral behind the scenes. The company's GPUs help power complex systems like conversational AI used by Siri on iPhone and smart devices like Alexa.
Nvidia will benefit from the windfall of data as it becomes a core pillar for businesses of all sizes. For the fiscal year 2022, Nvidia generated $10.6 billion in data center revenue, up 58% year over year. Nvidia CEO Jensen Huang said, "the applications for AI are unquestionably growing, and growing fast." Hyperscale data centers are an important end market for Nvidia as the Internet of Things (IoT) contributes to the rising data needs.
A bright road ahead
In the fiscal year that ended in January, the company grew revenue in all five of its reported segments and expanded its gross margins from 62.3% in FY21 to 64.9% in FY22. Nvidia's revenue growth and margin expansion have dropped right to its bottom line. The company's net income for FY22 more than doubled from $4.3 billion in FY21 to $9.8 billion. Despite supply chain disruptions, Nvidia has done a nice job of deploying capital efficiently and using its operating leverage. The improving profitability profile has helped the company bolster its cash balance, which sits at $21.2 billion, up from $11.7 billion the year prior.
As supply chain woes linger, 2022 will be an interesting year for Nvidia's management. But given its capitalization and its explosive growth across all reporting segments, Nvidia appears well-positioned for future growth even without Arm as part of its business.
