Nvidia (NASDAQ: NVDA) just hit another income report out of the park. Revenues for the second quarter of fiscal 2022 significantly exceeded management’s expectations and increased 68% year-over-year. The party is set to continue into the third quarter – Nvidia expects a 44% increase in sales year-over-year at midpoint. This is particularly impressive considering that sales rose 57% in the third quarter of last year. As expected, revenues from video games and data centers are leading the charge.

Some investors had worried about cryptocurrencies like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) taken last spring would upend Nvidia’s progress, but that didn’t happen. It wasn’t the 2018 Nvidia that suffered when cryptocurrencies plunged. A sudden drop in chip sales to crypto miners this year isn’t going to bring the company down. There are two main reasons why.

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Nvidia has made changes to the product regarding cryptocurrencies

In early 2021, Nvidia took steps to address a “problem” for years: Graphics Processing Units (GPUs) are coveted not only by gamers, but also by crypto miners (mining is the process by which cryptocurrencies are created and managed). To ensure that its new GPUs designed specifically for high-end video games end up in the hands of real gamers, Nvidia has started to incorporate an algorithm that reduces the hash rate (a unit of measurement for calculations performed during the process). mining) when it detects crypto mining.

Along with this change, Nvidia also launched its line of CMP chips designed specifically for mining. This product adjustment would help overcome the supply constraints of its high-end video game GPUs, and help both gamers and miners get the hardware they want. During the first quarter earnings call last spring, CFO Colette Kress said she expected a whopping $ 400 million in CMP sales alone. For context, game-specific sales amounted to $ 2.76 billion in the first quarter, but it’s unclear to what extent this was due to miners grabbing GPUs.

While the product line adjustments have been a great move, Nvidia just said in the latest earnings call that it’s still unclear how much of its video game segment’s revenue comes from mining. . But one thing’s for sure: The last cryptocurrency sale last spring didn’t really dampen the game’s momentum. Gaming revenue was $ 3.06 billion in the second quarter. Adding to the evidence that the lion’s share of those GPUs actually go to gamers, Kress said CMP sales were only $ 266 million in the second quarter, well below his expectations of $ 400 million. . In addition, Kress said he expects “minimal contribution from CMP in the future.” In other words, even though mining is in decline right now, the gaming segment still registered 11%. sequential gain in the second quarter and is expected to grow again in the third quarter.

Clearly, the profitability of mining has taken a hit since cryptos fell from all-time highs earlier this year, impacting parts of Nvidia’s business. However, that doesn’t slow down the business as much as the global value of gamers is updating their platforms 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 is one step ahead on this front. A temporary slowdown in cryptocurrency mining isn’t going to change that.

Data center activity is much bigger than it was in 2018

Crypto miners aren’t the only demanding GPUs in the non-gaming end-market. Data centers – the compute units that form the backbone of cloud computing – are also increasing their use of GPUs, putting them to work as compute accelerators to manage workloads and complex applications like artificial intelligence. (IA).

Nvidia has had a surge of innovation on this front in recent years, releasing a slew of new chips designed for these data center customers. It also acquired network hardware company Mellanox early last year to strengthen this emerging area of ​​expertise. As a result, the data center segment achieved second quarter revenue of $ 2.37 billion and gradually caught up with the size of the gaming unit.

For comparison, when the 2018 crypto crash pushed Nvidia down (in Nvidia’s 2019 fiscal year), data centers only accounted for about a quarter of total revenue. They now represent more than a third of the total.

Nvidia is just getting started on this front as well. Some of its more recent data center hardware announcements haven’t even started to hit the market yet (like its Grace central processing units that integrate directly with its GPUs). This is a huge segment of the semiconductor industry which has long been dominated by Intelligence. Tens of billions in annual sales are up for grabs if Nvidia’s innovations can continue to gain momentum.

Long story short, Nvidia’s data center segment is a much larger part of its business than it did a few years ago, and it is growing, especially as it begins to add services as well. cloud computing software. Fears that the downturn in the crypto market last spring would decimate Nvidia again were overblown. Sure, another increase in crypto activity would help, but it’s not a primary catalyst for this chip designer. This is the best long-term investment in semiconductors because it benefits from several secular growth trends in the global economy.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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