Something is causing great consternation among Nvidia Corporation (NASDAQ:NVDA) investors, who are down nearly 6% on their investments so far in 2017. That’s after NVDA stock hit a high of more than $119 as recently as February.
![NVIDIA Corporation (NVDA) and the Changing Cloud](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
In the original vision for cloud computing, a decade ago, it was an article of faith that the cloud was designed to harness cheap, low-power chips and combine their resources to get the most bang for a computing buck.
The advent of artificial intelligence, and the need for clouds to support AI, is forcing a re-think.
This is highlighted by Alphabet Inc (NASDAQ:GOOGL) — the artist formerly known as Google, the first company to bring the cloud to glory — designing its own machine learning chip, dubbed a Tensor Processing Unit. It is said to deliver a lot more price-performance than “competing” processors from Intel Corporation (NASDAQ:INTC) and, to our point, Nvidia.
But those who are bearish on NVDA stock are missing an important point.
Everybody Wins
First, the new Google chip was compared against an old Nvidia chip, not its newest design. More importantly, as Nvidia CEO Jensen Huang wrote in a recent blog post, this is a war where every advanced chip company is going to win.
“Without accelerated computing,” he wrote, “the scale-out of AI is simply not practical.” Artificial intelligence, or deep learning, “is a new computing model that has required the invention of a new computing architecture.”
The design models that Nvidia has been using for graphics are ideal for deep learning, and thus for delivering AI at scale. This was the point when Alibaba Group Holding Ltd (NYSE:BABA) announced more than a year ago it would ally with NVDA on cloud AI for its “AliCloud.”
Google may order production of a bunch of Tensor chips for its cloud processing centers, but do you think Amazon.com, Inc. (NASDAQ:AMZN) or Microsoft Corporation (NASDAQ:MSFT) are going to be filing big orders for a direct cloud competitor’s processors?
Not when there are alternatives around, and there are. As Mr. Huang noted, Nvidia has one.
A Needless Kerfuffle
Nvidia did $6.9 billion worth of business for the quarter ending in January, mainly for graphics processors used in game machines, and its last two quarters indicate fiscal 2018 sales will run well over $8 billion.
The April quarter is notoriously weak because most new models come out in the fall for delivery at Christmas. Last year, NVDA had sales of $1.3 billion in the April quarter, from which $470 million, or 73 cents per share, flowed to net income.
Analysts covering NVDA stock expect the quarter will deliver $1.87 billion in revenue, and 66 cents per share of earnings (about $400 million), when the numbers come out May 9.
BMO says checks of Asian supply chains show a 16% drop in graphics card shipments. A 16% drop off the last quarter of Nvidia sales would come to within a hair of $1.87 billion, or $1.825 billion.
Before these reports came out, Nvidia stock was selling at about $108. A normal seasonal adjustment is going to shave 10% off the stock’s price? Short it?
Please.
InvestorPlace’s Bret Kenwell likes this pullback, and our Josh Enomoto says you should not worry. I agree with them.
Cloud Future Clears
High-end processor companies have been trying to get into the cloud for a decade, and until recently they were having no success at all. Now, Alibaba and Google have invited them in, and this is good news for anyone selling such hardware. For Nvidia, this is incremental revenue on top of what it’s currently getting from other markets.
This is a big deal, and most reporters worth their press badges have been on to it for some time.
NVDA stock is a buy at these levels, and at higher ones as well.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GOOGL, AMZN, MSFT, BABA and INTC.