When it comes to the chip space, much of the attention has been on Advanced Micro Devices (NASDAQ:AMD) lately, whose stock has been on a powerful bull run. But of course, there are other notable operators to keep an eye on. One is Nvidia (NASDAQ:NVDA). Nvidia stock looks as if it might be back on track for growth
Note that last week Needham analyst Rajvindra Gill published a report, which included an increase in the price target from $325 to $350. This implies 27% upside for Nvidia stock.
His main thesis is that the company’s focus on AI (Artificial Intelligence) will be a long-term driver. He also notes that the TensorRT Hyperscaler Platform is likely to see strong gains in market share. In fact, Gill compares NVDA’s position to that of what Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) commanded during the 1980s and 1990s with the Wintel franchise.
Now it’s true that analysts can be wide off the mark and sometimes be overly optimistic. But I think Gill is on target with Nvidia. The fact is that the company’s play on AI is expansive.
This has been due to several key factors. One is that the company’s GPUs have proven to be ideal for AI as the technology can process huge amounts of data cost effectively. Next, Nvidia has spent more than 20 years investing heavily in R&D – building a strong IP (Intellectual Property) portfolio.
AI Power and Nvidia stock
The gaming market is where Nvidia initially focused its business (the company was founded 1993). And it is still a major part of the revenue base.
The good news is that there continues to be solid growth in the category. During the latest quarter, there was a 52% jump on the top-line to $1.8 billion. Some of the drivers include eSports as well as AR (Augmented Reality) and VR (Virtual Reality). Such features require high-end chips.
Consider that Nvidia has recently launched a next-generation GPU technology, which relies on a Turing architecture. This allows ray tracing that’s 25 times faster than existing systems. This will mean much more immersive experiences.
But of course, there is much more than gaming when it comes to Nvidia stock. There is also the datacenter business, whose revenues soared by 83% to $760 million in the latest quarter.
The move to cloud computing is a megatrend that is likely to last for many years and there will be a need for sophisticated AI functions at hyperscale. Nvidia also has a long list of marque customers like Amazon.com (NASDAQ:AMZN), MSFT and Google (NASDAQ:GOOG, NASDAQ:GOOGL).
And finally, there is self-driving. The business is still in the early stages – the second quarter revenues came to $161 million — but the growth potential is enormous. According to Nvidia, the size is about $60 billion. And to capitalize on this opportunity, the company is aggressively creating a ecosystem, which has over 370 partners.
Bottom Line On NVDA Stock
Nvidia stock is far from cheap. The forward price-to-earnings ratio is 34X. But then again, a premium is to be expected for a company that continues to grow at a hefty rate. In the most recent quarter, total revenues for Nvidia grew by 40% to $3.12 billion and profits nearly doubled to $1.1 billion.
More important for Nvidia, the long-term potential is massive. According to Market Research Engine, the spending on AI is forecasted to exceed a whopping $191 billion by 2024. In other words, there is still a long runway for Nvidia stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
