Easily one of the best stories among the big technology firms, shares of Nvidia (NASDAQ:NVDA) returned almost 81% in 2019. Moreover, Nvidia stock is off to a solid start in the new year, up a little over 4%. Still, with the equity steadily approaching 2018’s all-time highs, should investors adopt a more cautionary stance?
It’s a fair question because for one thing, Nvidia stock crashed hard shortly after it reached its peak market value. It turned out that you can’t keep a good company down for long, which was great for speculators. However, shares are no longer the compelling undervalued pick they once were.
Furthermore, the broader bull market will eventually wear out its welcome. Obviously, this could put pressure on Nvidia stock, which is levered toward businesses that are sensitive to consumer sentiment.
On the flipside, the semiconductor industry is one of the few convincing bright spots in the U.S. economy. For example, the industrial production index for computers, communications equipment and semiconductors has skyrocketed since the Great Recession. Few other sectors, when adjusted for inflation, are as convincing as this technological category.
Additionally, Nvidia’s peers, such as Intel (NASDAQ:INTC) and especially Advanced Micro Devices (NASDAQ:AMD), continue to build off their 2019 momentum. While that doesn’t guarantee a smooth ride for Nvidia stock, over the long run, I see a continued upward trek for the tech giant. Specifically, here are three factors to consider.
Nvidia Stock and Rising Importance of AI
What makes Nvidia stock intriguing to investors is not just their processor prowess. Rather, the underlying company has shifted toward groundbreaking innovations such as artificial intelligence and deep learning.
Currently, Nvidia has multiple initiatives for their AI interface, including improving citizen services. However, with the rise of geopolitical tensions and the threat of asymmetric attacks – that’s a polite way of saying terrorism – AI can play a crucial role in next-generation defensive mechanisms.
Better yet, Nvidia has partnerships in place to help develop the smart cities of tomorrow. Granted, the company’s efforts are focused more on transportation efficiencies and safer operations. But with the AI platform in place, it wouldn’t be a stretch to implement counterterrorism initiatives through innovations like facial recognition and behavioral analytics.
Further, today’s visceral threats don’t involve bombs dropping from the sky from belligerent nations. Instead, law enforcement agencies are concerned about seemingly inconspicuous threats, such as domestic terrorism. However, AI is an effective tool to bolster security coverage, which in the long run could benefit Nvidia stock.
Video Games Remain an Intriguing Tailwind
Arguably, most people recognize the Nvidia brand for its premium graphics processing units or GPUs. And that’s not a bad gig to have. Over the last several years, the video game industry has evolved from a niche segment of male nerds who have no chance of procreating to a surprisingly diverse and lucrative market.
When it comes to video games, console makers, such as Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), have dominated the headlines. Here, rival AMD scored a major coup when Sony announced that it will run its chips for the upcoming PlayStation 5. Obviously, that’s not great news for Nvidia stock.
Nevertheless, gamers can be separated into two categories: serious players and everybody else. For Nvidia, they have a strong case for addressing the former category due to their GPU expertise. Moreover, serious gamers are very much willing to fork over the dough.
Out of the total worldwide gaming PC and accessory revenue, 43% can be attributed to sales of high-end gaming PCs. The rest is split between mid-range gaming PCs (35%) and entry-level gaming PCs (22%). In other words, as gamers dive into the realm of competitive gaming, their spending increases dramatically.
Clearly, this benefits Nvidia stock, where the underlying tech firm has built a reputation on premium (read expensive) GPUs.
Don’t Ignore the Cryptocurrency Rally
A few years back, one of the catalysts for the then-dramatically rising Nvidia stock price was the cryptocurrency rally. To make a long story short, cryptocurrencies emerge from complex transactional calculations associated with a particular blockchain architecture. I’m grossly oversimplifying the process but in order for a computer to complete the calculation in a quick enough timeframe, it must have stacks of advanced GPUs.
This process, called mining, was profitable because the price of cryptocurrencies kept rising. But when the bubble popped, the mining industry no longer made economic sense. This immediately deflated demand for mining-specific GPUs, notably hurting Nvidia’s revenue stream.
Today, when people think about Nvidia stock, they’re probably not considering bitcoin and other major cryptocurrencies. But in recent weeks, the price of bitcoin has significantly moved higher. For example, I mentioned the longer-term case for bitcoin on Dec. 19. Since then, the crypto has jumped approximately 30%.
I’m not suggesting that you should buy Nvidia shares solely for a possible bitcoin comeback rally. What I am suggesting is that the crypto market is still relatively quiet. Thus, any GPU sales associated with virtual currencies is all bonus points for Nvidia.
As of this writing, Josh Enomoto is long SNE and bitcoin.