Even though the markets will likely remain volatile, I still think it’s worth taking some positions in top tech companies, and NVIDIA (NASDAQ:NVDA) stock may be one of those names.
Before the coronavirus from China pushed equities into bear territory, Nvidia was running on all cylinders. In its latest reported quarter, its revenues jumped 41% year-over-year to $3.11 billion and its earnings, excluding some items, came in at $1.89 per share, for a YOY gain of 136%.
Granted, Nvidia does face some lingering risks. Perhaps its biggest risk is the competitive environment. Advanced Micro Devices (NASDAQ:AMD) has continued to make inroads in the lucrative datacenter market. Despite AMD’s relatively small size, it has been able to push the boundaries of innovation.
Intel (NASDAQ:INTC) is another rival that is gaining traction. Of course, the company already is dominant in the datacenter market and is also developing its own Graphics Processing Unit (GPU) chips.
Even companies like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon.com (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) are building their own chips. Their main focus is on the fast-growing Artificial Intelligence (AI)) market.
While all of this is worrisome, I still think Nvidia should remain in a strong position. As the pioneer of the GPU market, the company has been able to build a powerful ecosystem of partners. What’s more, GPUs have become essential for AI. Keep in mind that GPUs can simultaneously process huge amounts of data at low costs.
Consider that shipments of Nvidia’s T4 system – which enables sophisticated inference computations – have spiked 400% during the past year. Some of the company’s top customers that use the system include Twitter (NYSE:TWTR), PayPal (NASDAQ:PYPL) and Microsoft (NASDAQ:MSFT). GPUs have proven to be effective in key areas like Natural Language Processing (NLP), facial recognition and deep learning.
For example, with Nvidia’s chips, the thoroughput of Microsoft’s Bing search engine has jumped 800 times compared to CPUs. As a result, the system has been able to process 1 million computations per second for conversational AI.
Or look at Alibaba (NYSE:BABA). The company has used Nvidia’s chips for its deep recommendation engine, whose click-through rates have jumped 10%.
Something else to consider: Nvidia’s pending acquisition of Mellanox (NASDAQ:MLNX) should be a nice boost to its AI business. Nvidia’’s technology enables servers to efficiently absorb the power from other servers, making it much easier to create sophisticated, deep-learning models.
The Bottom Line on NVDA Stock
So what about the impact on Nvidia from the coronavirus from China? Well, as is the case with many companies, the virus will pressure Nvidia. On its latest earnings conference call, the company did lower its fiscal Q1 revenue guidance by $100 million to $2 billion, plus or minus 2%. But given the major drop in the stock recently, it seems like much of the guidance cut has already been factored into the valuation.
Again, expect the stock’s volatility to continue. And NVDA could drop further. That is why it is a good idea to be cautious when taking positions in it. But for long-term investors, NVDA stock does look like a good choice, as it is one of the few ways to play the megatrend of AI.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.