Nvidia (NASDAQ:NVDA) has some key positive drivers heading into its fourth-quarter results, which are expected to be reported Thursday after market close. I believe that Nvidia’s 2020 guidance will be boosted by its very strong position in artificial intelligence and autonomous vehicles. And as a result, NVDA stock should climb in the wake of the company’s results.
Furthermore, the consensus among analysts is that the company’s Q4 revenue will increase year-over-year. If the expected rebound does materialize, it would be the first YoY gain in more than a year. Meanwhile, Intel’s (NASDAQ:INTC) recently reported quarterly results bode well for Nvidia and NVDA stock.
The Artificial Intelligence Market
As I noted in a previous column, Intel “expects data centers’ demand for AI chips to reach nearly $12.5 billion in 2024,” while “data centers are ‘increasingly running AI algorithms to analyze data to, for instance, identify customer trends that otherwise might be too hard to spot,’ Dow Jones reported in December.”
Moreover, Nvidia’s chips are generally viewed as having the best capabilities for data centers, with Analytics India Magazine pointing out that the AI chips of a new company acquired by Intel performed “great” but were “second only to Nvidia in some categories.” Nvidia’s acquisition of Mellanox Technologies (NASDAQ:MLNX), one of the world’s leading AI chip makers, should only further enhance NVDA’s leading position in the sector.
Underscoring how important AI is becoming to a wide variety of companies, Investor’s Business Daily quoted research firm Tractica as saying:
“The global AI market is entering a new phase in 2020 where the narrative is shifting from asking whether AI is viable to declaring that AI is now a requirement for most enterprises that are trying to compete on a global level.”
A Catalyst for Nvidia and NVDA Stock
Additionally, according to a recent Barron’s article, true “autonomous driving is a long way off, but ADAS (advance driver-assistance systems) is coming on strong.” ADAS takes over the control of a vehicle for a limited amount of time in order to prevent accidents or make driving easier. That said, Nvidia launched a new ADAS offering in January 2019, and NVDA is already partnering with 370 companies in the auto sector.
Collectively, true autonomous driving may not be that far off. As I reported previously, Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Waymo has been offering rides in its true driverless cars “in the Phoenix area for over a year.” Waymo is also developing riderless trucks and already is providing self-driving vehicles to a number of businesses, including AutoNation (NYSE:AN).
One Nvidia partner, Optimus Ride, is also a leader in the self-driving space. Optimus has been providing rides in autonomous cars within a limited area in Brooklyn since at least March 2019. It previously operated in Boston’s Seaport District, and has since expanded the service to Reston, Virginia and Fairfield, California. Although the vehicles currently operate with two company employees on board, the company plans to offer fully autonomous rides “later this year.”
By the end of this year, many companies — including multiple Nvidia partners — will be offering services with truly autonomous vehicles. Although, last year NVDA’s automotive business provided only around 5%-8% of its total sales. Nonetheless, the explosion of ADAS and advent of true autonomous driving will move the needle for NVDA stock by 2021.
A Threat Facing NVDA Stock
In Q3, about 25% of Nvidia’s revenue came from China. As I’ve previously noted, China is looking to rapidly expand its chip sector. That could become a threat to Nvidia towards the end of this year or early next year. However, I think its other positive catalysts will overcome any potential headwind from China.
Year-Over-Year Revenue Increase and Strong Peer Results
Analysts’ mean estimate for Nvidia’s Q4 revenue is $2.96 billion. This is about 34% above the company’s top line during the same period a year earlier. That said, the return to YoY revenue growth should be very encouraging — and, should provide a lift to NVDA stock; It needs it after a long period of weakness due to contracting sales of cryptocurrency equipment.
Moreover, as InvestorPlace columnist Vince Martin pointed out, the recently reported Q4 results of Intel indicate that the data center market is rebounding strongly and is trending well ahead of analysts’ average estimates. Specifically, the sales of Intel’s data center jumped 19% YoY to $7.2 billion. This is in comparison to analysts’ average growth outlook of about 6%.
Additionally, Martin reports that Advanced Micro Devices’ (NASDAQ:AMD) sales of GPUs indicate that it does not seem to have gained share of the data center market at Nvidia’s expense.
The Bottom Line on NDVA Stock
Overall, Nvidia looks poised to grow rapidly — driven by the proliferation of AI and autonomous driving. Investors, however, should keep an eye on the threat posed by the rising Chinese chip sector. Nonetheless, I expect NVDA stock to outperform the market this year.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies.
