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Enhancing AI Capabilities to Drive NVIDIA (NVDA) Q4 Earnings

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NVIDIA Corporation (NVDA - Free Report) is anticipated to impress investors once again with its stellar performance in the fourth-quarter fiscal 2018 results which it will report tomorrow after the market closes. Notably, for the last two years, the company’s quarterly revenues have been advancing at a rate more than 50%, earnings have tripled and shares have displayed more than six-fold growth, consequently.

This Santa Clara, CA-based chip-making giant is well known for its high-performance graphics processing units (GPUs) used by PC gamers. However, for the last two years, NVIDIA’s strategy of applying its GPUs in the artificial intelligence (AI) models has helped it expand footprint in several fast-growing fields, including self-driving cars and datacenter.

AI, which is a global rage these days, has long been touted as the next big thing in the technology sector, with its usage rising gradually with each passing day.

Let’s delve deeper and find out how AI is supporting NVIDIA in other growing markets.

Front Runner in the Self-Driving AI Space

For the successful operation of autonomous vehicles, a powerful AI supercomputing platform is required. And NVIDIA has successfully innovated the required GPU and became the front runner in providing technology for self-driving vehicles.

It should be noted that NVIDIA forayed into the autonomous vehicle and other automotive electronics space by launching a computer vision system at the Consumer Electronics Show (CES) in 2015. It hasn’t looked back since then and has been continuously bringing in new and more advanced technologies in the space.

At the beginning of 2016, NVIDIA launched DRIVE PX 2 — the world’s most powerful engine for in-vehicle AI. Later in September that year, the graphic-chip behemoth unveiled an AI supercomputer chip designed for self-driving cars called Xavier at its GPU Technology Conference (GTC) in Amsterdam.

The company’s AI-enabled GPUs have helped it win several contracts from the auto and component manufacturers. At the CES 2018, the company announced that it has such contracts from more than 300 companies which show NVIDIA’s growing dominance in providing AI platforms which will power future vehicles.

The company’s cutting-edge technology has helped it become the leading player in providing AI for applications to autonomous driving vehicles, outpacing other competitors, such as Intel (INTC - Free Report) and Advanced Micro Devices (AMD - Free Report) , in terms of growth.

Continued contract wins have brought additional revenues. It should be noted that the company’s Automotive segment’s contribution to the total revenues was just $54 million at the end of fiscal 2015, but it is expected to reach approximately $575 million at the end of fiscal 2018. Per the Zacks Consensus Estimate, the Automotive segment’s revenues will be approximately $150 million, representing year-over-year growth of 17%.

Click here to know how the company’s overall Q4 performance is expected to be.

NVIDIA Corporation Price and EPS Surprise

Datacenter Remains the Fastest Growth Driver

NVIDIA is also a leading player in selling its GPUs to datacenter service provider. Its client list includes Amazon (AMZN - Free Report) , Microsoft and Alphabet.

Demand for NVIDIA’s datacenter-focused products has escalated due to an increase in datacenter production around the world, and management has successfully marketed its solutions to compete with industry leaders like Intel. Per the Consensus Estimate, the segment is likely to be up 85.5% from the year-ago quarter level and reach $549 million in the fiscal fourth quarter.

Apart from self-driving and datacenter markets, increasing use of cryptocurrencies is also driving demand for NVIDIA’s GPUs, as it helps create digital currencies like Ethereum, Monero, Cash and bitcoin gold. As the craze for digital currencies has been growing rapidly, we believe the company will continue to witness demand for its GPUs from miners.

Bottom Line

Although past performances do not guarantee similar results in the ensuing year, we feel optimistic about the stock given massive growth opportunities in AI and related fields. A few months back, Bank of America Merrill Lynch’s analyst, Vivek Arya, and Evercore ISI’s analyst — C.J. Muse — noted that NVIDIA is well poised to dominate the AI market. Arya, in a note written to clients, had mentioned, “Similar to other large successful tech industries, we expect the $30bn AI chip market to also feature one dominant supplier – we think NVDA.”

Another analyst Mitch Steves of RBC Capital Markets stated that the company is well poised to get the “first-mover advantage” and will continue maintaining its sturdy presence in the AI training system.

All this makes us optimistic about NVIDIA’s fiscal fourth-quarter performance where its strengthening capabilities in the AI space will be a crucial growth driver.

NVIDIA currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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