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Q4 2019 US Chip Earnings: Data Center Demand Is Back and Cloud Capex Growth Reaccelerates From 8% to 14%

Written in 2020. Charts are the originals from the time of publication. · Collected in Earnings and supply chain notes, 2019–2022

By Picaca · 2020-02-15 · Read the Chinese original

Q4 2019 US chip earnings show data center demand back: NVIDIA data center revenue up 42.6%, Intel DCG up 18.8%, and 2020 cloud capex growth of 14%.

In our February 2020 flash note on MediaTek's 5G handset forecast, we noted that since the second half of 2019 the market has been raising its 2020 forecasts for 5G penetration, but MediaTek's earnings call showed expectations are already high, and the work stoppages in China put the growth outlook in question. The US chip earnings reported over the past few weeks point at the other big driver of semiconductor growth: data center demand has started to grow fast again.

Key takeaways

  • NVIDIA's data center revenue grew 42.6% year over year in the fourth quarter of 2019, ending three straight quarters of year over year declines, setting a record dollar amount for the segment, and taking data center back above 30% of total revenue.
  • Intel's Data Center Group (DCG) revenue grew 18.8% year over year, its best growth in the past year, with the segment rising to 35.7% of revenue.
  • AMD is targeting 10% server share by the second quarter of 2020, up from 7% today, and Xilinx still grew data center revenue 8% while its overall business was shrinking.
  • Cloud capital spending (capex) growth is forecast at 14% in 2020, up from 8% in 2019, and Alphabet (Google) says more of that money goes to servers than to data center construction, which points the benefit at compute, storage, networking and racks.

Data center revenue jumped across the chipmakers

Start with NVIDIA, which just reported its fiscal fourth quarter of 2020, the calendar fourth quarter of 2019. Total revenue grew 41% year over year. Data center revenue grew 42.6%, which ended three consecutive quarters of year over year declines, set a record dollar amount for the segment, and pushed data center back above 30% of total revenue.

NVIDIA quarterly data center revenue in millions of US dollars with year over year growth.
Figure 1: Figure 1: NVIDIA data center revenue (US$ millions) and year over year growth
NVIDIA revenue split by segment over time as a percentage of total revenue.
Figure 2: Figure 2: NVIDIA revenue mix by segment

At Intel, fourth quarter 2019 revenue in the data center related segment, the Data Center Group (DCG), grew 18.8% year over year, its best growth of the past year, and the segment rose further to 35.7% of total revenue.

Intel quarterly Data Center Group revenue in millions of US dollars with year over year growth.
Figure 3: Figure 3: Intel DCG revenue (US$ millions) and year over year growth
Intel revenue split by segment over time as a percentage of total revenue.
Figure 4: Figure 4: Intel revenue mix by segment

AMD said on its call that the data center business grew significantly as well. The target for the second quarter of 2020 is 10% server share, up from 7% today.

Xilinx, which mainly makes FPGA (field programmable gate array) chips, is recovering more slowly than the other three. Even so, with the overall business in decline, its data center related revenue still grew 8% year over year.

Set Xilinx and its shrinking business aside, and the big chipmakers all show a clear step up in both the data center share of revenue and the growth rate of that business. Data center work carries relatively high gross and operating margins, so the mix shift helps profitability.

Cloud capex is forecast to grow 14% in 2020

Data center demand is pulled by the cloud vendors. After the sharp increase in capital spending in 2018, capex growth slowed across 2019. In 2020 growth picks back up, from 8% the year before to 14%.

Table of capital spending by cloud company in millions of US dollars with year over year growth.
Figure 5: Table 1: Cloud company capex (US$ millions) and year over year growth

The efficiency gains keep pulling more enterprises onto the cloud, so the cloud vendors are putting a large share of their capital spending into data centers to serve that demand.

On its fourth quarter 2019 earnings call, held in February 2020, Google said data center capital spending will keep rising this year, and that relative to 2019 it expects to spend relatively more on servers than on data center construction.

"In terms of CapEx in 2020, we intend to increase our investment in both technical infrastructure and office facilities versus 2019."

"Relative to 2019, we anticipate relatively more spend on servers than on data center construction."

Source: Google fourth quarter 2019 earnings call, February 2020.

That language confirms two things for this year: cloud capex growth is recovering, and the server related pieces (compute, storage, networking and racks) get more of the benefit than the buildings do.

A data center recovery lifts the related stocks

The research firm IDC has data volumes growing to 175 zettabytes by 2025, a compound annual growth rate above 30%. Big data and high performance computing running in the cloud are making companies more efficient.

Working through this earnings season confirms that data center has come out of its 2019 trough, and that building out high performance computing and investing in data centers remains a long term trend. Leave out Intel, which makes its own chips, and the other three companies above are all TSMC customers. So the data center recovery has a fairly direct read across to TSMC and to the related Taiwan electronics stocks.

Data center growth is clearly recovering right now, while the 5G handset story still carries some noise. So on current positioning we prefer the names tied to data center growth.