For the first time in its history, graphics processing unit (GPU) manufacturer Nvidia (NVDA 0.35%) generated a higher quarterly revenue in its data center segment than in its gaming division. While some investors may not truly understand the significance, I believe this is a massive step for the company. This flip shows Nvidia's resilience as it faces several volatile markets.
Once just a company focused on improving gaming graphics, Nvidia has expanded its product offerings to multiple other areas. It now splits its business into four divisions: Gaming, data center, professional visualization, and automotive and robotics. That said, is Nvidia's stock a buy now?
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The data center division's strong growth drives Nvidia's future
Invented in 1999 by Nvidia to enable real-time programmable shading, the GPU remains the company's primary offering. However, today's GPUs are a far cry from their ancestors. Today, GPUs enable cloud computing, run engineering simulations, mine cryptocurrencies, and power autonomous vehicles.
NASDAQ: NVDA
Key Data Points
Overall, Nvidia's latest quarterly results (Q1 2023, ending May 1) were solid. Revenue was up 46% year over year (yoy) to $8.3 billion, while non-GAAP net income rose 49%. While Nvidia is profitable from a GAAP (generally accepted accounting principles) standpoint, there was a $1.35 billion charge from the termination of the proposed Arm acquisition, which adversely affected GAAP earnings.
The data center division was the strongest, with revenue rising a massive 83% yoy to $3.8 billion. Gaming still grew a respectable 31% YOY but relinquished its largest segment crown with $3.6 billion in revenue.
Why is the data center revenue growth significant?
Data centers use GPUs to accelerate workloads, aiding artificial intelligence (AI) and machine learning. Specifically, Nvidia's data center products are best in class and power infrastructure like the DHX H100 enterprise AI infrastructure, which is expected to be the world's fastest AI system when it goes online later in 2022.
The move to the cloud and the harnessing of AI's power is just beginning, giving Nvidia a massive market opportunity.
Is gaming doomed?
Now that data center revenue has surpassed that of gaming, a crown the latter may not retake soon, does it mean doom-and-gloom for gaming?
While GPUs are still used to power gaming computers, they are also used to mine cryptocurrencies. Nvidia continues to produce more powerful GPUs in this market, as gamers and miners are always looking for an edge over competitors. Because of this, gamers will always be in search of the latest and greatest.
However, if cryptocurrency prices continue to fall, demand for GPUs used to mine crypto will likely follow suit.
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This drop is precisely what happened in 2019 when cryptocurrencies crashed, and demand for GPUs fell off a cliff. Nvidia attempted to address this in its Q1 quarterly conference call by informing investors that "the extent in which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision." Because the GPUs used for gaming and mining are identical, breaking out the gaming division revenue isn't possible.
Even with falling crypto prices, the hash rate -- which measures how much computing resources are used to process transactions in a proof-of-work cryptocurrency -- for the two most popular cryptocurrencies is barely down from their highs. Because miners continually set new computing power highs, more GPUs are being sold to power the network, contributing to Nvidia's gaming center revenue.
Data by YCharts.
In short, the gaming segment doesn't seem to be affected by the cryptocurrency market.
However, Ethereum will be switching to a proof-of-stake model later in 2022, which means the cryptocurrency will no longer be mined. This switch could adversely affect Nvidia's gaming division due to decreased demand for GPUs.
Regardless, Nvidia's management felt confident enough in the business to announce a $15 billion share repurchasing program. This plan would reduce the outstanding shares by about 3%.
Nvidia's management sees revenue growth of 25%, including a $500 million effect for the second quarter caused by China lockdowns and Russia's war on Ukraine. While this marks a considerable slowdown, it is still respectable growth given Nvidia's size.
Trading around 50 times earnings and down more than 40% from its all-time high, Nvidia is a great buy here. This price represents an excellent opportunity for value investors to get into a stock levered to one of the largest growth opportunities available, cloud computing. Moreover, while cryptocurrency mining is a wild card, Nvidia is better prepared for a downturn than it was in 2019.
