Another day went by in July and early August with shares of Nvidia Corporation (NASDAQ:NVDA) reaching new highs. Valuations are of secondary concern for shareholders.
After the company reported strong growth in the last quarter, Nvidia did so again when it reported second-quarter results on Aug. 10. The autonomous driving and GPU computing market is a growing market, but investors should ask if Nvidia will sustain its revenue growth rates.
Datacenter and automotive markets are two segments of the market that could offset the growing competition in Nvidia’s core market, GPUs. The company faces competition from Advanced Micro Devices, Inc. (NASDAQ:AMD), which just reported a quarter demonstrating solid GPU sales.
AMD reported revenue growing 51% year-over-year in its computing and graphics division. It made revenue of $659 million. Conversely, Nvidia reported data center revenue growth of 175% to $416 million. Automotive revenue grew 19% to $142 million.
NVDA stock may not adequately price in the risks of accelerating competition. AMD’s Polaris GPUs are optimized for mining cryptocurrency, due to its open software architecture. Conversely, Nvidia has a proprietary, closed-end system, which doesn’t perform as well. The company is reportedly targeting the cryptocurrency market by launching GPUs optimized for mining.
Nvidia still has no real competitive pressures for its high-end GTX cards, but that will change with AMD’s Vega Frontier Edition. This product will first target the high-end professional market, including scientists and mathematicians. In phase 2, Vega will target the PC enthusiast community.
Nvidia’s GPU dominance could come into question. Despite the looming threat from AMD, leaked results suggest Vega performs on par with Nvidia’s GTX 1080 card. Nvidia eased investor fears when it reported revenue from GPU of an incredible $1.9 billion, up 59% year-over-year.
AMD still has an ace up its sleeve: It may price Vega below the GTX. From there, Nvidia could respond by cutting prices. It may adjust the release date of Volta, focusing instead on GTX card sales first.
AMD Exits Discrete GPU (dGPU)
AMD’s release of Ryzen leaves out integrated graphics support. The company is effectively ceding the market to Nvidia. Its actions acknowledge that it cannot keep up with Nvidia in this segment.
Nvidia’s New Markets
Investors are looking forward to the role Nvidia will play in Artificial Intelligence. Nvidia is making AI possible. It teamed up with Baidu Inc (ADR) (NASDAQ:BIDU) to power deep learning neural network systems. Whereas Baidu will focus its efforts on developing the software, while Nvidia will supply the hardware.
Nvidia moved ahead of the competition, especially against AMD, by developing the parallel compute computing platform. It already sold millions of CUDA-enabled GPUs. The potential for this platform will only get bigger as software solutions take advantage of the big, CUDA-enabled GPU cards in the market.
No Competition in AI
With Nvidia facing little competition in sales of hardware supporting AI, investors should anticipate the company growing its market share. It has a solid moat that will keep companies like Intel Corporation (NASDAQ:INTC) from taking its business.
Intel’s Xeon Phi is a poor-performing chip. Nvidia will continue to push the boundaries on AI chips. As its performance per watt gets better, Intel will fall further behind.
Bottom Line on NVDA Stock
Investors are not fully pricing in the potential pressure on Nvidia’s GPU business. AMD’s Polaris success is not hurting Nvidia’s to the fullest degree at this time. The company’s product pricing is still drawing higher sales every quarter. The high-end GTX card is not competing with AMD’s Vega yet, either.
Vega’s release came later than markets expected, so AMD will not take much of Nvidia’s high-end market in the near term. In the interim, Nvidia continues to invest in AI, growing its moat and expanding its market share.
After NVDA stock dipped following second-quarter earnings, shareholders should continue holding the stock despite its high valuations. Chances are good the stock will keep moving higher.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.