What do you think is the world’s hottest tech stock right now? Is it Alibaba Group Holding Ltd (NYSE:BABA)? Is it Amazon.com, Inc. (NASDAQ:AMZN)? Could it be Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or perhaps Netflix, Inc. (NASDAQ:NFLX)? All guesses are wrong. It’s Nvidia Corporation (NASDAQ:NVDA), the graphics chip designer; NVDA stock is up a whopping 212% over the last 12 months.
It opened for trade July 18 at about $162 per share, nearly 55 times its trailing-year-earnings and 14 times its 2016 sales of $6.9 billion.
Nvidia has its hands in the hottest tech market of the moment: artificial intelligence. Its graphics chips are considered essential to self-driving cars, and cloud companies are buying them to add AI support to their offerings. Gaming also remains hot.
But heat can be the enemy of computer chip performance, so can NVDA stock continue to perform as it has, or must it slow down?
Nvidia Stock: Demand Ceiling Unlimited?
The company’s 2016 revenues were up 40% over the previous year, with nearly 25% of it hitting the net income line. Growth has continued to be strong, with sales for the quarter ending in April up 48% over the previous year’s $1.305 billion.
That is the kind of performance that has analysts raising their price targets and InvestorPlace writers like Luke Lango wondering if we should “chase it.” Noted Nvidia stock bull Jim Cramer likes to bemoan the fact he doesn’t own it in his charitable trust — maybe you can sell yours to him. Any short-term weakness can be interpreted as a “dip” making it seem a bargain, as Josh Enomoto writes, because its fundamentals are so strong.
The key to NVDA stock remains AI, which has transformed the company’s image from that of just a “graphics” company to something much more. The fast processing of graphics chips produces a “deep learning platform” that must be in clouds as well as on devices to create new types of applications.
These twin growth drivers could be transformative, as Richard Saintvilus writes, but Nvidia stock isn’t alone in this market. Advanced Micro Devices, Inc. (NASDAQ:AMD) also has a graphics chip, and more competitors could be coming. Even if they’re not better than Nvidia, they could be good enough for some applications, taking market share.
The point is that NVDA has a lead in a hot market, but it does not have a monopoly. Right now, Nvidia stock is being priced as though it has a monopoly.
What Could Trip Up NVDA Stock?
A slowdown in any Nvidia market could hurt the stock, because it’s priced to perfection. Even a blip like the recent fall in the price of crypto currency could cut demand.
Most of NVDA’s processor revenue still comes from game machines, just 21% from data centers. That’s where the growth is expected to come from in the future.
But cloud players are notoriously cheap. The whole point of cloud was to cut chip costs by using cheap chips to share the load of a bigger server processor. While most major cloud players have committed to adding Nvidia chips to their systems, will Amazon.com really put them in far ahead of demand, knowing that next year’s chips will be even faster? That’s the kind of game cloud was designed to avoid.
My guess is that cloud will add AI as demand for the application set grows, not ahead of it, and that the bullish Nvidia stock analysts may wind up disappointed in the near-term.
That is where I will look for my buying opportunity. Let the chip cool and it will run better. Let NVDA stock get a reality check and then pick it up.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, 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 BABA and AMZN.
