Nvidia Corporation (NASDAQ:NVDA), the leader in GPU (Graphics Processing Unit) chips and technologies, may be over 20 years old, but the company has been acting like a red-hot startup. And investors have certainly pumped things up. For the year, Nvidia stock is up a sizzling 227% and the market cap is at $58 billion.
But can the momentum continue? Or perhaps investors may want to get cautious with NVDA stock?
Well, the valuation metrics are definitely at nose-bleed levels. Consider that the forward price-earnings ratio on NVDA stock is at 40. By comparison, Intel Corporation (NASDAQ:INTC) trades at 13 times earnings and Qualcomm, Inc. (NASDAQ:QCOM) is at 13.5.
Then again, when it comes to momentum plays, the valuations may not mean much so long as the growth continues. And yes, it seems like a good bet that there will not be a slowdown anytime soon. During the latest quarter, NVDA posted a 54% spike in revenues to $2 billion and earnings more than doubled to 94 cents a share.
But hey, NVDA is targeting huge market opportunities, which should provide lots of runway for the growth ramp. So let’s take a look at three:
NVDA Stock Megatrend #1: Gaming & VR
Gaming is one of the oldest tech businesses. As a result, growth has not necessarily been strong. After all, the market size is at about $100 billion. But going forward, there are some key drivers that will likely juice things up. Of course, NVDA’s GPU systems will be a big part of this.
Games will soon get to the point where the visuals will be life-like. Oh, and then Virtual Reality (VR) will allow gamers to immerse themselves in the environment. The forecast for this market is nearly 4 million units shipped this year and 16 million by 2020.
Yet NVDA is already reaping the benefits from the favorable trends. For the past year, gaming revenues spiked by 54% to $1.244 billion. No doubt, a key has been the next-gen Pascal GPU system.
Something else: About 70% of existing gaming systems are on older GPUs. So there is quite a bit of opportunity for upgrades.
NVDA Stock Megatrend #2: AI and the Cloud
OK, so what does a GPU have to do with AI (Artificial Intelligence) and cloud computing? Well, as it turns out, quite a lot.
Keep in mind that companies want to do much more than just manage documents and track workflows. Rather, they want to leverage cutting-edge technologies to help identify trends or provide insights. But to do this, there needs to be tremendous computing power — and this is spot-on for GPU systems.
As for NVDA, it has invested heavily in building an end-to-end AI platform that allows for deep-learning. There is also the Tesla Accelerated Datacenter Platform, which has standout metrics on speed and costs. Just some of the global customers include Barclays PLC (ADR)(NYSE:BCS), JPMorgan Chase & Co. (NYSE:JPM) and Schlumberger Limited. (NYSE:SLB).
In terms of the market opportunity, it is enormous. According to Gartner, the total global spending is forecasted to increase from $204 billion in 2016 to $318 billion by 2019.
Although, when it comes to AI, the applications are quite broad. For example, one category is industrial robots — there are 2 billion worldwide — that could benefit from human-like intelligence capabilities.
NVDA Stock Megatrend #3: Autos
Many of the world’s top tech operators, like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL), are scrambling to get a piece of the auto market. Consider that – on a worldwide basis – it comes to a staggering $10 trillion.
Yet NVDA could be the company that is best positioned to capitalize on this. The company has developed a full platform for so-called AI car computing — called NVIDIA Drive PX 2 — that uses high-performance chips and software to detect surroundings as well as determine optimal routes. For example, Tesla Motors Inc (NASDAQ:TSLA) uses the system for all its vehicles. In all, there are 39 automotive technology and software customers.
So far, the auto segment for NVDA is in the early stages, with revenues up 61% to $127 million in the latest quarter (this is about 6% of the total revenues). But the market opportunity is likely to be a game changer. According to NVDIA’s own estimates, it could be $10 billion or so.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
