By Jacob Sonenshine

Nvidia's earnings and financial outlook are a positive signal for a host of companies that make hardware for data centers.

Nvidia beat analyst's expectations for sales, which grew 78% from a year earlier, and earnings. It guided for a higher-than-forecast $43 billion in first quarter sales at the midpoint of management's range. That's up from fourth quarter revenue of $39.3 billion.

The results, at first, pushed Nvidia stock and the related tech names higher in premarket trading, but when news broke that additional tariffs on China, Mexico, and Canada will begin in early March, the stocks gave up their gains.

Tariffs would lift import costs, force companies to raise prices, and reduce consumer demand. Stocks across the U.S. market may experience some volatility related to the tariff issue, but at some point the market will better understand the resulting impact to earnings in the near-term, and then will assume tech sector profits will grow from that base over the long-term.

Growth for Nvidia has been driven by sales of its data center chips, which totaled $35.6 billion in the fourth quarter and was boosted by the early ramp-up of artificial intelligence products "Hopper 200" and the more advanced "Blackwell." Management expects a "significant ramp" of Blackwell demand in the first quarter. Technology service companies that are building out data centers to fuel their AI capabilities need these chips.

This outlook shows that data center demand isn't slowing down so much. Data center sales rose 93% in the fourth quarter from the prior year. Since Nvidia's total revenue guidance for the first quarter calls for 65% growth from a year ago, and the data center is its fastest-growing segment, it's clear that data center growth is still explosive.

Coming into Nvidia's report, analysts were forecasting 67% data center growth for this year's first quarter according to FactSet, but with analysts already publishing notes saying that they're raising estimates, the expected growth will likely be higher than that.

"The datacenter opportunity is enormous, and still early, with material upside still possible," writes Alliance Bernstein analyst Stacy Rasgon.

This bodes well for fellow chip maker Micron Technology. Micron saw the majority of its $28.5 billion in total sales last year come from areas outside the data center, but it's just ramping up sales of its memory chips for the data center. These memory capabilities support Nvidia chips, so the higher the demand for Blackwell and Hopper, the higher the demand for Micron's AI memory chips. Analysts see Micron's annual revenue opportunity hitting tens of billions of dollars several years from now.

It also bodes well for chip maker Broadcom, which saw $53.2 billion in total sales last year. The company saw more than a fifth of that revenue from AI chips last year, as sales for those chips grew 200%. Even though growth will slow down, it'll remain extremely high for some time, helping push sales and profit higher.

Amphenol, which makes small connectors for a variety of customers across industries, is tethered to Nvidia. It saw $15.2 billion in sales last year. Analysts expect sales of its data center connectors, which Nvidia chips rely on, to ramp up to over $1 billion this year. The company has continued to grow across most of its other areas, especially as it acquires the many smaller connector makers around the world. Its most recent earnings were higher than expected. The AI story is a help to the company's continued profit growth.

Vertiv Holdings, manufacturer of cooling and power systems, sees about three quarters of its $9 billion in annual revenue from the data center. It's one of three companies that provide this highly specialized equipment, has enjoyed higher prices most years, and sells more equipment as companies continue to build out their data centers. Nvidia's report confirms this long-term growth thesis.

Vertiv CEO Giordano Albertazzi tells Barron's that, in his conversations with his large customers that are building data centers, he sees no sign of hesitation on all the investment. The Big Tech companies in the U.S. are expected to boost their capital investments by double digit percentages annually -- totaling hundreds of billions of dollars each year -- which is why Vertiv's data center sales are also growing above its guidance for 16% total sales growth this year.

Eaton, one of the other cooling and power product makers, sees the minority of its $25 billion in annual revenue come from data centers. It's still a double-digit percentage, though the company doesn't directly disclose the numbers.

Arista Networks makes network switches for data centers. It sees more than 10% of its revenue from Microsoft and Meta Platforms according to Arista's 10-K filing. Those customers building out their data centers -- and those are just two of Arista's data center customers. The company saw 20% total sales growth, driven by AI demand, to $7 billion in 2024.

Morgan Stanley analysts "continue to see Arista Networks as best positioned" to capture a $30 billion potential market for its products over the long-term.

All of these stocks rose in premarket trading, some of them more than 1%, before the tariff news hit. This suggests that they have the potential to price in more of the AI opportunity from here, as long as the long-term growth story unfolds as it already has to date.

Anyone who's ridden the rallies in these stocks over the past few years should hold on. They have plenty of potential for more gains.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 27, 2025 11:42 ET (16:42 GMT)

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