What Led To The Surge In Nvidia’s Data Center Revenues In Q2’16?

Nvidia‘s (NASDAQ:NVDA) data center revenue stood at $151 million in Q2’16, which translates to a little over 10% of its overall revenues in the quarter. The company’s data center business, which it started reporting as a separate segment only two years ago, has been growing much faster than its overall business. The revenue from the segment has more than doubled in Q2’16 on a year over year basis. In the analysis below we look in detail the factor underlying the strong growth in Nvidia’s data center business:

Increased Use of GPUs In Deep Learning

Nvidia has been able to enter the server chip market with its GPUs, the application of which is exponentially increasing in hyperscale data centers. The hyperscale data centers are applying deep learning algorithms to enhance their applications and make them smarter. It must be noted that the server processor market is currently dominated by Intel (NYSE:INTC), with over 90% of the market share.

However, the demand for Nvidia’s GPUs in hyperscale data centers has increased of late. This comes from the fact that the computation time involved in processing complex deep learning algorithms decreases significantly with the use of GPUs, as compared to a traditional CPU, due to the capability of a GPU to compute parallel instructions. Nvidia claims that hyperscale companies such as Facebook, Alibaba, Baidu and Microsoft have been fast adopting deep learning for real time inference in applications of video processing, image processing and natural language processing, which is driving the growth for its GPUs.

Nvidia’s Past Investments Paying-off Well

Nvidia claims that it could foresee the huge deep learning opportunity five years ago. The company also claims that it has been investing heavily to build a platform for deep learning in its GPUs since then, and the performance improvements it has brought is reflected in its current line of GPUs with Pascal architecture. With a strong surge in the data center revenues in the last few quarters, it looks quite evident that Nvidia’s efforts are paying-off well.

Interest in deep learning is surging as industries and basis researchers increasingly seek to harness this revolutionary technology. Deep learning currently represents almost half of Nvidia’s data center revenue and accounts for vast majority of growth in the data center business. We believe that deep learning will continue to fuel growth going forward as well, as Nvidia is likely to remain at the forefront of this technology.

We are in the process of updating our valuation for Nvidia.

See our complete analysis for Nvidia

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