As Wall Street debates whether Nvidia (NVDA) can make good on its promise for a major second-half sales rebound, a couple of recent developments bode well for its ability to do so.
To recap: Nvidia forecast on Thursday that its fiscal 2020 (ends in Jan. 2020) revenue would be flat to down slightly, even though the company's April quarter revenue guidance implies a 31% annual drop at the midpoint. The company also forecast its Gaming segment revenue, which fell 45% annually in the January quarter and is also expected to be weak in the April quarter, will only be down slightly in fiscal 2020.
Not all analysts are sold on this outlook, which implies that Nvidia's PC gaming and server GPU sales will rebound sharply. Gaming revenue has been badly hurt by a mid-range GPU inventory crunch that has followed a collapse in demand from cryptocurrency miners, and has also been stung by weaker Chinese demand (blamed on macro issues) and a slower-than-expected ramp for Nvidia's high-end, Turing-architecture, gaming GPUs. Server GPU revenue has been hurt by a spending pause among cloud giants (also reported by other chip and hardware suppliers), with Nvidia adding that other enterprises are ordering more cautiously due to macro worries.
On its earnings call, Nvidia forecast that gaming graphics card inventories will normalize this quarter, and (though only time will how macro trends and trade talks play out) expressed optimism that Chinese demand will rebound, given the strength of the country's PC gaming culture.
The big wild card for Nvidia here is the consumer reception (in China and elsewhere) for its Turing lineup, which was just expanded to include notebook GPUs and a mid-range desktop GPUs (the RTX 2060). In its Jan. 28 warning, Nvidia admitted that some gamers were waiting for "further demonstrations" of Turing's unique features -- namely, its support for real-time ray tracing, which can enable photorealistic game imagery, and an AI inference feature (known as deep learning super sampling, or DLSS) that can improve game performance -- within published games.
This week, a pretty compelling "demonstration" arrived, as reviews were published for Metro Exodus, a first-person shooter that supports ray-tracing and DLSS. Though comments about DLSS' impact were mixed -- it meaningfully improved performance, but also hurt image quality a bit -- reviewers were quite positive about the impact that ray-tracing (easily Turing's bigger selling point) had on image quality.
"[H]oly cow, is Metro Exodus built to stun with ray tracing enabled," wrote Ars Technica. "I have uttered 'wow' about the graphics more times in this game than I have in reviewing anything else in a while." For now, only two big-budget games (Metro Exodus and Electronic Arts' (EA) Battlefield V) support ray-tracing. But plenty of others are on the way.
Meanwhile, though spending on the chips and hardware going inside of cloud data centers has entered a lull, tech giants are still investing heavily in building new data centers, as their Q4 earnings reports demonstrated. And earlier this week, Alphabet/Google (GOOGL) , which is believed to be a major Nvidia client, disclosed it plans to invest $13 billion this year on U.S. data centers and offices.
Tech giants still appear quite keen on making giant investments in AI/deep learning training systems (powered to a large degree by Nvidia GPUs) to create algorithms that power everything from voice assistants to self-driving cars to enterprise cloud services. And they're also starting to spend more on AI inference accelerators that can offload the job of powering those services from server CPUs. Though competition is starting to pick up a bit, Nvidia still looks well-positioned to grab a large portion of the spending that cloud giants direct towards AI accelerators.
As the Googles and Amazons of the world start filling up the data centers that they're building with servers and storage later this year, Nvidia's server GPU sales should get a major boost. Likewise, its gaming GPU sales should get a lift as new games arrive this year that can take advantage of ray-tracing in a manner similar to how Metro Exodus managed to.
