Motley Fool Money - Nvidia Shoots For The Stars

Episode Date: August 24, 2023

Just how big can Nvidia get? For CEO Jensen Huang, it’s to infinity and beyond. (00:21) Tim Beyers and Deidre Woollard discuss: - Nvidia’s strong quarter and the cyclicality of chip demand. - Why Nvidia isn’t the only game in town for AI chips. - How Snowflake’s data warehouse solutions might grow over time. Companies discussed: NVDA, AMD, INTC, SNOW Host: Deidre Woollard Guest: Tim Beyers Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. Spheric run isn't done yet. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidra Willard here with Motley Fool analyst. Tim Byers. How are you doing today, Tim?

Fully caffeinated. Ready to go, Deidra. Well, I think you have to be fully caffeinated because we've got a little rocket ship thing happening with Invidia. I was one of those weirdos last night, like waiting until like 4 o'clock, 4.05, refreshing the investor relations page to see what happened. I think I was not disappointed. Revenue. up 101% year-over-year, data center sales growth. Just crazy. Gross margin was up 26.6 points. This is so good, it makes me nervous. Tim, should I be nervous? No, I don't think you should be nervous. But I will say that the market seems to either have priced in most of the growth we're already seeing, or there's just general unsettledness around the market.

And so the stock isn't rallying the way you would normally expect it. As we're recording this, DEDRA is up only about 3.5%. And for results like this, you would expect, maybe even three months ago, we would have seen like a 20% or even a 30% move. But we're not seeing that. So the market's either priced in a lot of the growth we're seeing, or there's just some general unsettledness. But overall, you really can't do much better than this.

The data center business, as you pointed out, this is primarily where Nvidia is getting its growth from. And revenue in the data center business was up 171% from a year ago. It was up 141% sequentially. That is bananas. And the second quarter revenue from gaming at $2.49 billion, So again, these two primarily account for 90 plus percent of all of the revenue that Nvidia generates.

So it's up 11 percent sequentially, 22 percent year over year. Primarily, Didera, almost all of this growth is coming from the idea that the world needs generative AI and Nvidia is going to provide that generative AI. And in this latest quarter, boy, did they provide quite a lot of it. But is there a concern that they're getting over their skis on how much of it they're providing, or is it just that we're going to see demand coming from places that maybe we hadn't even considered before? Well, I would say it is likely they will get over their skis at some point because it's very hard to absolutely, particularly in this kind of business where hardware orders come in and you take a while to build out,

the inventory to meet that demand. And so if you're pre-building inventory and then suddenly demand slackens, which does happen in this business, you see things like inventory write downs, you see sharp reductions and margins, things like that. That's happened to Invidia before. It could very easily happen again. Nobody knows exactly when that is going to happen. For the moment, it does appear that demand is

going to continue at a very brisk pace for quite some time. And what we're seeing is that to the point you just made, it may be from unusual areas of the market, but overall, there's just such an insatiable appetite for feeding things like large language models. And we should be, without getting too far down a tech rabbit hole here, Diedra, but large language models are hungry. I mean, you can think of them as the cookie monster of data center workloads. I mean, they just want more and more and more and more. And usually it's for things like memory, very high throughput processing equipment, where there's tons of memory attached to it.

I remember on one show of This Week in Tech with Tim White, and he was talking about how he had loaded a local large language model onto one of his machines and just the amount of memory it was taking, just the heat that it was causing inside of his machines, like one large language model, almost forcing a meltdown of a software developer's machine and an experience software at that in Tim. So these things are very hungry, and because they are so hungry, we can expect a man to continue at pace for quite some time. We just don't know when the tipping point comes. And the tipping point is when we start thinking about, okay, we've done all kinds of training. We've been consuming just data set after data set after data set. At what point do we start

sharpening our focus to maybe smaller sets of data or different opportunities? And so the volume is not so vast. When that tipping point comes, Diedra, that's when, you're going. You're you do see the risk of Nvidia getting over at skis. Well, and I think it's interesting, too, because you think about total addressable market also seems to be sort of rippling out, though, as well. I think what we're seeing is that there is a general belief, and I think this is partially naive, but I'll say it anyway, that large language models are the key to unlocking, you know, big value in a lot of different industries. I think that's partially naive because a large language

model in and of itself really doesn't do anything. And if you feed a large language model a lot of data, the value that you get back is really going to be in some ways equivalent to just how good that large language model infers useful conclusions. And as we know, we've seen a lot of instances where large language models, chat GPT, being chief among them, decide to hallucinate some things. And so those imperfections and inference are going to continue to be something that we contend with. And so there will be probably quite a lot of work out of how to make data sets smarter. But in the meantime, we are going to just chew through a whole bunch of data and then decide later where we get the greatest value from chewing through data. And as we start to winnow that down and

figure out where the greatest value is created, then demand will start to slacken. But I would not be surprised if over the next year, demand continues at a very brisk pace. At triple-digit growth rates, I'm not so sure, but for a while, yes, I can see it, Deidre. It's interesting because I think there is what you point out there, there's sort of a gap between excitement and utility. And right now we're in the excitement phase. We're going to get to the utility phase eventually. Right. And when we get there, then demand, it's not just, I mean, demand might fall off a cliff. Let's be clear. But it's more like figuring out where to put dollars to work most effectively.

And because you're exactly right, we're in this very hype-driven phase, we don't know where we're going to get the most value for the dollars committed. Right now is we are just committing dollars. We need more cookie, cookie. Cookie cookie. That's what we need. Really, honestly, I swear, large language models are like software versions of the cookie monster with all apologies to Sesame Street because I love Sesame Street. Who doesn't love the cookie monster? Well, you know, it's interesting that the market hasn't gone crazy over this because last quarter they went crazy over the guidance. This quarter,

Nvidia came through with a forecast of $16 billion in revenue from the next quarter, even bigger. So why did the market not respond? Are they, is it just that this quarter is a little weird about guidance? Because that's what it feels like to me. No, I think the expectations are baked in. Okay. You know, if the stock is not, you would see the stock moving, in my opinion, you'd see the stock moving even with the market down today as we're recording this. I think you would still see NVIDIA moving a lot more if the expectations had been more muted coming into this quarter, but I think the expectations were absolutely enormous. So there just isn't a lot of institutional money that is piling on.

Instead, what the action suggests is that there are certainly some institutions that are buying, but there's probably some institutions too that are taking some profits and saying, wow, this is amazing. I know that this is an incredible growth story here, but I've got some big profits on this. How about I take some right here? Because there isn't such an overwhelming belief that, or maybe there is, but we're not seeing it in the stock price action right now, an overwhelming belief that growth will continue at this pace for an extended period of time. I think we would have seen a much more bullish reaction if this really shocked people and they left convinced that the growth story is much longer and much more durable than expected. I think we're still kind of feeling this out and wondering just how durable it can be.

And some of that, to be clear, some of that is justified. We have been here before with Nvidia. I mean, we're not that far removed from the crypto days when everybody needed an Nvidia GPU to mine crypto. Aren't you mine crypto? Why aren't you mining crypto? That was a big, big deal. And then that demand went away. And it really did leave Nvidia longing for growth that had gone missing. And so there may be some people who remember those days and are being cautious.

So I think there's a lot. We don't yet know what we don't know about the growth story here. But I would say it looks positive. It just doesn't feel like the market has decided that, wow, this is an unrelenting growth story and this is going to go on for years. You make such a good point about the crypto. And it makes me think about the CEO, Jensen Wong. He just, I mean, I've been listening, I listened to those calls during the crypto era,

and he always generates this kind of cool confidence. Yes. And he's so believable. And, you know, there is this quality to him that makes me want to trust him. You know, he's never super, super hype, but he's very confident. So he's, and he sounds now the same way he did then. He's talking about, you know, generational shifts and this is. is just the beginning. So what do you feel about the way that he presents these types of opportunities?

Well, I think he's right in that there is the potential for a generational shift here. But if there is a generational shift, we're pretty early in the shift. So, you know, treat all predictions with a giant cautionary sign, you know, above them blaring in at least yellow lights, proceed with some amount of caution, but also proceed with some optimism here because there is reason to believe that AI demand will continue for some time. I think that demand will sharpen, and Nvidia will not be the only beneficiary here. So I do think there are other ways to look at this. Like, will they be the only AI company? Will we only be doing generative AI compute with GPUs?

And there's no other option for doing that? I don't think so. I mean, what you really need, if you're talking about generative AI compute, you're talking about machines that can process in parallel at very high rates, lots of throughput, you're going to need lots of memory. So it's not going to be one silver bullet. it that solves it. If it's a generational shift, DEDRA, that means it's an industry-wide shift that NVIDIA will participate in and maybe even lead, but they will not be the only ones.

So what does that mean for companies like AMD and Intel? It's way too early to tell. I would put more money on AMD than I would on Intel only because I think Intel is a little bit earlier in its transition to a company that's also building out foundries as well as updating its roadmap of data center processors, whereas AMD is not anchored with that. They are very much building highly advanced, very fast data center chipsets, and they've been doing it at scale for quite some time now, and they have integrated their Xilinks acquisition from a few years. years ago and figuring out how to take the core AMD chipset, put a field programmable gate array with that.

And that essentially all that means, Deirdre, is that those chips can be purpose built. They can be designed straight and programmed straight into the silicon to do something very, very specific, which makes them super useful for data center compute. So sure. You could see real tailwinds. here for NVIDIA, but are they the only ones? No, not by a long shot. You could see AMD profiting from this as well. We just don't know when the spend starts to sharpen, but I do predict Didera. I think if we assume that this is going to go on forever, the spending at the present

rates, then I think we're diluting ourselves. It will sharpen at some point maybe 12 to 24 months from now, but I'm not going to get into the predictions game here. I would just say, if I am holding AMD shares and I am responsible for a portfolio that is holding AMD shares, I'm not looking to sell right now, but I am looking at how the market treats that position. And if it becomes just irrationally priced as if growth will go forever, then I might have to take some off the table, but I'm not ready to do that yet. With Nvidia having a bit of the jump ahead, is some of it the partnerships that it's already building?

And does that create any kind of moat against those other competitors? Is it a moat? It certainly provides some protection, sure. I mean, the ecosystem around Nvidia is pretty interesting. They also have lots of software that is highly useful. useful. Like the software that goes with their AI systems is particularly useful, and that does give them a bit of an advantage. They also have partnerships with lots of different big players. And of course, they want Nvidia, GPUs, and systems in the large public clouds or partnered like VMware is a

recent partner here. And they want you to be able to, you know, maybe rent out or get access to a virtualized cloud formation powered instance that is backed by a set of or a set of Nvidia systems or processors and you can rent that out and that is very efficient. So that partnership makes some sense that you could go get, you know, you could go get access to the compute power you want on the terms that you want it. They want to do those kinds of deals. I'm certain with all of the major public clouds as well. Invitya is in the process of seeding the market and trying to become the standard for generative AI compute at a moment when the industry has a real hunger for generative AI compute. So in some ways, yes, those ecosystem partners

give them a lead in sort of developing that market position of being, we are the go-to. Look at all of our partnerships. We are where you go when you want generative AI compute. So certainly, there's something to that, but they won't be the only ones. Makes sense. I want to pivot to Snowflake, because they reported yesterday afternoon as well, sort of getting eclipsed a bit by the monster that is Nvidia, but they had a really solid quarter, solid results. So what Snowflake does, as I understand it, and you can correct

me, but they're a provider of data warehouse solutions. And so they have their own role in this AI space, because as you talked about, Cookie Monster, you've got all this data to wrangle. Yeah. They had 37% year-over-year growth, strong remaining performance obligation. They're clearly connecting with customers. What should we know about Snowflake? I mean, they had a good quarter. They had a very good quarter, but it's certainly not as a blowout of a quarter as I would say NVIDIA had. It was much more moderated, and the stock is down a little bit because the market has sort of given back some gains today. That's not too surprising. And actually, that's completely fine. But overall, product revenue up 37%. But I'll tell you the things that really stood out to me,

Deidre, that I thought were super important. The first is that this is a company that's defined by, getting customers to increase their consumption and their reliance on Snowflake over time for storing, analyzing, processing, and using data. So one way to think about what Snowflake does is a very advanced data warehouse. A data warehouse is where you put information and is very well organized. Think of a physical warehouse and everything is marked and categorized and you know exactly where it is on the exact right shelf and all of that. that thing, that's a data warehouse, you know, very well orchestrated. Snowflake has this,

and it's in the cloud, and they have been very successful at convincing large companies to say, go with us, we are independent, we'll let you operate in any cloud that you want, and store your data here, and we'll let you do things with the data. Right inside your snowflake environment, you don't have to export it anywhere, which leads to more usage of the snowflake platform, and we have seen that really compound growth inside the snowflake platform. So, as of this latest quarter, 402 customers spending a million dollars or more annually, that was up from 246 over the same quarter last year. That's up 63 percent, Deirdre.

That is what I want to see. When you have those very large customers growing at that rate far faster than overall revenue. Meanwhile, the net retention rate is 142%. That's down from where it's been. It's been in the 170s, but that's still massive. That's 42% more that these existing customers are spending on Snowflake year over year. And they've been doing this for a while now, like really compounding their spending. So the thesis is they're going to get more of those really large customers. And so to see that is highly encouraging. Their overall customer growth was up 25%. Like I said, the 142% net retention rate. And then a couple of other quick things, marketplace listings, which is Snowflake customers

who have data that they are making available to the market through Snowflake, those listings were up to 2,149, that was up 39% year over year. So the Snowflake platform is allowing customers who have data to do more with it. That is also a very good sign. And one more, 26% of customers now have at least one stable edge. And a stable edge is when two snowflake environments come together and there's data sharing in between those two. You think of them as an edge and another edge and they come together.

and they share data, and there's no integration that has to happen. No transformation, nothing like that. It's just two snowflake environments cooperating. And so when we see more snowflake customers cooperating, working together, it makes the entire platform more valuable. So seeing these kind of performance indicators, Deidre, it gives me a lot of hope that we're going to see high growth for a much longer period of time.

It's a little bit of the opposite of NVIDIA. Like, NVIDIA, I think, is going to be really high growth for a period of time. And then there's going to come a point where that growth is probably going to go off a cliff and really slow down significantly because the demand curve just drops off. We've seen that before. It wouldn't surprise me if that happened again. With Snowflake, as they build these kinds of relationships, more data. being used by more customers and more snowflake environments operating together, more stable

edges, more marketplace listings, all this type of stuff, more consumption at the highest possible levels. That convinces me that Snowflake can grow at a very high rate for a much longer period of time than the market expects. So I don't, like if you could visualize, you know, Nvidia just climbing like a roller coaster and then dropping off. Not because that's bad, just because you would think that's natural. It's a cyclical business. For Snowflake, I would say, slow and steady, but a pretty high growth rate up into the right and a slowing and maybe even slightly increasing or maybe slightly decreasing curve, but very high growth. And that line goes out much further than we might even expect. Interesting. And it's interesting seeing these results at, we're still in this, what they call

the like elongated sales cycle, right? Where their customers maybe aren't making those sales decisions as fast as they used to. So as that changes, because everything always changes, is that going to be, is that when the snowflake starts growing again? Because it seems like these two companies, they have a connection, but the, but maybe the sales demand or the sales cycle is a little bit different? Yeah, it's disaggregated. It's going to be a little further out for Snowflake. They're in this part of the market, which we would probably call enterprise software enterprise cloud spend. There are customers that are deciding how much do they want to spend and where do they want to spend it. And so they're optimizing what are the tools where they get the biggest bang for their buck.

and so they're slowing some spending on different tools. We saw this, for example, with Data Dog. We're seeing it a little bit with Snowflake. And so the growth is slowing a little bit. But remember, this is still up 37% year over year. I mean, that is heady growth. It may not be triple digit anymore, but that is still very heady growth. So there's a bit of optimization happening right now,

where that is not happening at all for Nvidia. But there will come a point, Didera, where the reverse becomes true, where like we have had just a flood of spending to feed these large language models. And then we get some optimization like, okay, how much hardware do we really need? And so that part of the market gets optimized. Whereas then at that point with Snowflake, like, okay, we've optimized things. Now what are we really going to do with Snowflake? and then you see maybe a little bit of re-acceleration. Let's not to get too crazy because, again, 37% growth is really high growth.

Even if it doesn't re-accelerate, if it stays relatively steady for a long period of time, that is a really, really good outcome for investors, Deidre. Yeah, absolutely. All right, I got to wind us up on kind of a silly question, which is, so Snowflake, they want to get their leadership really excited about the data cloud. They're doing this thing that I think is kind of interesting. They've got this data cloud world tour. It kind of sounds like a concert, 26 cities, three regions. What is this?

I mean, is this just to get people excited about Snowflake? I thought it was sort of an interesting marketing spin. Yeah, I think it is. I mean, we've seen this before. It is a little, it's probably a little too hypey, but also when you go, go on these sorts of tours and you are meeting customers where they are, that can be a very good thing. Essentially, it's a giant, you know, rotating sales conference. You know, and you're just bringing customers in and talking them through what their workloads

might be, what their needs are, and trying to get FaceTime with them. I don't have a big problem with it. It does feel like unnecessarily rock and roll. So it feels a little bit strange. Like it feels like the, you know, the 80-year-olds are getting out on tour. Getting out the bands back together. It feels a little bit like that. But honestly, it is getting in front of customers that really does matter.

So I don't have a big problem with it, but I do see how it feels like a little, okay. This isn't, you know, you're not really rock and roll. We know who you are. We know you sell data warehousing software. Let's just calm down a little bit. It is not Taylor Swift. It is not. This is not the Arestore.

Nope. Thank you for your time today, Tim. Great to see you. Thanks, Deidre. As always, people on the program may have interests in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Deidrell Willard.

Thanks for listening. We'll see you tomorrow.