Any conversation regarding 2019’s large-cap chip leaders must include Nvidia (NASDAQ:NVDA), NVIDIA stock is up 63.48% year-to-date. That compares nicely with the 33.57% returned by the Nasdaq-100 Index.
Nvidia stock isn’t the best-performing chip name, and it’s trailing rival AMD (NASDAQ:AMD) by a wide margin, but those facts don’t detract from the Nvidia story. Nvidia stock has recently been showing signs of strength, gaining 7.55% in November while outperforming the PHLX Semiconductor Index by nearly 300 basis points last month.
Nvidia stock has been on a torrid pace in the fourth quarter, surging 30.68%, issuing a fair amount of regret to third-quarter sellers of the name, including a certain former vice president. With Wall Street turning increasingly bullish on Nvidia stock, near-term regret could come in the form of assuming the stock has already run up too much or that it’s too expensive compared to other chip stocks.
Last week, Morgan Stanley semiconductor analyst Joseph Moore upgraded shares of Nvidia to “outperform” from “equal weight” while boosting his price target on the name to $259 from $217. That implies upside of more than 19% from the Friday, Nov. 29 close of just under $217.
“But the stock has not meaningfully outperformed the robust semiconductor group, and as we look into 2020, we see catalysts for Nvidia’s growth accelerating on nearly every vector, even in what we expect will be a tough semiconductor environment — ray tracing software support should generate more gamer enthusiasm in gaming products, and new data center workloads around conversational AI should lead to another leg of data center growth.”
Other Catalysts for Nvidia
When it comes to Nvidia, the catalysts most often mentioned are graphics processing units (GPUs), the chips that drive performance for PC and console video games, and the company’s burgeoning data center chip business. Those are important, relevant considerations to be sure, but wide-ranging factors, such as artificial intelligence (AI) and augmented/virtual reality need to be mentioned as well.
A recent study by Accenture confirms the importance of AI to chip industry growth in the years ahead.
“Three-quarters of semiconductor executives surveyed for the report (77%) said they have adopted AI within their business or are piloting the technology,” according to Accenture. “In addition, nearly two-thirds of semiconductor executives (63%) expect that AI will have the greatest impact on their business over the next three years, compared with just 41% of executives across 20 industries.”
A UCLA study indicates GPU chips with AI applications could propel significant advancements in the booming field of medical technology.
“These results are broadly applicable to any phase recovery and holographic imaging problem, and this deep-learning-based framework opens up myriad opportunities to design fundamentally new coherent imaging systems, spanning different parts of the electromagnetic spectrum, including visible wavelengths and even X-rays,” according to researchers at the UCLA Henry Samueli School of Engineering and Applied Science.
Bottom Line on Nvidia Stock
While it may be a while before Nvidia’s efforts in areas such as autonomous vehicles and AI payoff in material fashion for investors, the important thing over the here and now is that the company is building enviable positioning in those fast-growing markets.
That positioning is vital in diversifying a revenue stream that, currently, is heavily reliant on the hyper-competitive gaming and data center chip markets. That said, there is expected to be a significant video game console upgrade cycle coming in 2020, which could prove to be a catalyst for Nvidia stock.
At 30.40x forward earnings, Nvidia isn’t cheap, but it’s less expensive than rival AMD. With Nvidia’s lead in the market for discrete GPUs and the growth of the cloud computing market that’s thirsty for those chips, the chipmaker’s growth is worth paying up for.
Todd Shriber does not own any of the aforementioned securities.