The stock market is a “what have you done for me lately” business. I believe that’s the situation that Nvidia Corporation (NASDAQ:NVDA) finds itself in. In an economy that is becoming increasingly immersed in artificial intelligence (AI), the question that investors might be wondering is “what’s next?”
Since 2016, NVDA has started to look like a high-flying growth stock and not a fairly predictable semiconductor company. But the market has a way of finding equilibrium and that may very well be the case for Nvidia stock.
The Market Already Recognizes NVDA as a Leader in AI
Back in May of 2017, many people including InvestorPlace contributor Larry Ramer were saying that Nvidia stock, which was up about 200% for the year at the time, was already pricing in the benefit of the AI revolution. Yet in 2018, NVDA stock exploded to over $286 per share in October of 2018.
The reason for this, in large part, was the need for Nvidia’s chips to power the mining of cryptocurrency. But cryptocurrency is a volatile business. And when the crypto bubble burst, the air went out of Nvidia stock as well. Shares plummeted over 50% by January of this year.
Now they’re climbing again. Nvidia stock has gained over 30% since the end of May to its current price of $182.52 per share. Some of that gain is due to its most recent earnings report. In August, NVDA reported a better-than-expected earnings per share, and a slight gain in revenue.
China Remains a Big Story for Nvidia
Another reason for the explosive growth in NVDA stock in 2018 was demand from China. It’s no secret that the U.S. and China are racing to show leadership in the AI space. In July 2017, Nvidia and Baidu (NASDAQ:BIDU) announced a partnership that would allow Baidu to use Nvidia’s technology for cloud computing service, self-driving vehicles, and AI home assistants.
But since the onset of the trade war with China, analysts are wondering if NVDA will lose access to this all-important market. And if they do, will there be avenues to replace it?
NVDA Is Moving Deeper into the IoT Space
This summer, Nvidia announced that it is the first AI platform to train BERT (one of the most advanced AI language models) in less than an hour and complete AI interference in just over 2 milliseconds. Companies recognize the significance of this breakthrough as they use real-time conversational AI to engage more naturally with customers. This means that hundreds of developers worldwide will use NVDA’s AI platform to advance their own language understanding research and create new services.
This initiative alone will seed the company more deeply into the growing Internet of Things (IoT) space. If estimates are correct, IoT revenue will top $373 billion in 2020 and hardware, like the kind Nvidia provides, will account for 52% of those sales.
This came after Nvidia’s announced partnership in April of 2018 in which ARM will use Nvidia’s open-source Deep Learning Accelerator (NVDLA) in its Project Trillium platform. Last month I wrote that this may not sound like a big revenue generator for NVDA in the short-term. However, it helps Nvidia create an ecosystem that will drive more revenue through its data centers.
The Bottom Line on Nvidia Stock
Prior to 2016, Nvidia was a semiconductor stock doing the things that semiconductor stocks do. It didn’t move too high or too low. It was predictable. Then AI came along and NVDA has become feted like a tech darling as investors rushed to get in on the “next new thing”.
I’m not down on Nvidia stock. The company is a legitimate leader in the technology that is fueling AI applications. But if the equity was looking overvalued at $140, it certainly seems to be overvalued at $180. That’s especially so since the consensus price estimate is $189.
Buy Nvidia for what it is – a semiconductor company. But don’t pay a price for Nvidia stock based on its current valuation with the expectation that it has a high ceiling: at least not right away. The AI revolution is not going away, but not every application or every company will be successful. Nvidia is just one link in the chain. And their success is dependent on others being able to deliver on their promises.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
