Even after the recent rally, Nvidia(NASDAQ:NVDA) is trading at almost the same level as it was in October 2018. Even with strong fundamental developments, Nvidia stock has been volatile and sideways. The primary reason has been the trade war between the United States and China.
However, I believe that the current rally in Nvidia stock is likely to sustain. I am of the view that NVDA has multiple business growth triggers that will take NVDA stock higher, particularly the growth outlook with a focus on the company’s data center and investment in artificial intelligence.
Datacenter revenue growth might have disappointed in the recent past, but I believe that it holds immense potential in the coming years. In particular, the adoption of artificial intelligence by the corporate sector globally will drive data center revenue.
To put things into perspective, McKinsey & Company estimates that AI applications currently generate data of about 80 exabytes per year. This is expected to increase to 845 exabytes by 2025. Clearly, there is big scope for growth and Nvidia is well-positioned to capitalize on this opportunity.
I believe that Nvidia stock can surge higher once there is an approval from Chinese regulators on the acquisition of Mellanox. Talking about the acquisition is relevant here.
“Mellanox pioneered the InfiniBand interconnect technology, which along with its high-speed Ethernet products is now used in over half of the world’s fastest supercomputers and in many leading hyperscale data centers,” according to Nvidia.
Therefore, I do believe that the acquisition is well-timed and regulatory clearances can take Nvidia in the range of $230 to $250. I also believe that regulatory clearance is a high probability with US-China trade tensions easing on a relative basis.
Artificial Intelligence Chip Market
According to Allied Market Research, the artificial intelligence chip market size was $6.6 billion in 2018. The market size is likely to surge to $91.2 billion by 2025.
The graphical processing unit is a part of the AI chip market and the expansion in market size over the next size years provides an insight into the growth potential for Nvidia.
Nvidia’s GPU is already being used in different industries. Just as an example, Nvidia Clara is being used in the healthcare industry with applications related to medical imaging and genomics. Similarly, the company’s GPU is being used in the retail industry for intelligent video analytics and inventory management, among others.
The key point is that Nvidia is leading the way when it comes to AI powered GPUs. With application potentially across all industries, there is immense growth potential.
Autonomous Cars Also Present Big Opportunity
Another big growth opportunity for NVDA is in the autonomous cars industry. According to Allied Market Research, the autonomous vehicle market is likely to grow from $54.2 billion in 2019 to $556.7 billion by 2026.
Nvidia has already partnered with companies like Audi (OTCMKTS:AUDVF), Toyota (NYSE:TM), Volvo (OTCMKTS:VOLAF) and Mercedes-Benz and Volkswagen for autonomous cars. As the market expands, self-driven cars will open a completely new revenue stream for NVDA.
Of course, these are opportunities that will have a meaningful impact in the next 3-5 years. However, NVDA certainly has a technological edge and an early mover advantage to capitalize on the big growth opportunities.
Final Views on Nvidia Stock
It is worth noting that Nvidia stock was trading at $133.8 in the beginning of June. The stock has subsequently been on a gradual uptrend and I believe that this rally will sustain.
In the near-term, third-quarter results and potential regulatory clearance for Mellanox deal will take Nvidia stock higher. In the medium to long-term, the factors discussed will serve as stock upside catalysts.
Overall, NVDA stock is worth considering even at current levels. In the next 3-5 years, Nvidia will be significantly more diversified in terms of revenue and cash flows.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
