The Pending Mellanox Acquisition Will Sustain Nvidia Stock Here

Investors have a lot to look forward to in Nvidia's growth-filled future

After Nvidia (NASDAQ:NVDA) stock soared to $316 in February, the breakout proved short-lived. Growing fears over the impact of the coronavirus from China sent the stock market lower. But the Federal Reserve’s determination to soften the market’s drop sent NVDA stock into a V-shaped recovery.

Get in on NVDA Stock While the Getting Is Still Good
Source: michelmond /

The stock rose 25% in the last week. Even if the markets see another selloff, why might NVDA stock hold its value?

The first answer to that question involves an exciting acquisition that’s underway right now.

Mellanox Acquisition Will Strengthen NVDA Stock

Upon approval from China, Nvidia will acquire Mellanox (NASDAQ:MLNX) for $6.9 billion. Mellanox will strengthen Nvidia’s positioning in the high-performance computing (HPC) market. The two firms unite Nvidia’s computing platform with Mellanox’s interconnects. They will power hundreds of supercomputers worldwide.

Plus, the firms are set to grow their market share in the HPC market. Artificial intelligence, data analytics and scientific computing demand continue to expand. Regardless of the current economic slowdown, companies need hyper-scale and enterprise data centers. The need for more computing performance is never-ending. So, customers will want the power of Nvidia’s graphics chip (GPU) and Mellanox’s intelligent networking solution.

In the GPU space, demand for Nvidia’s ray tracing is only increasing. More game developers are embracing this framework. And because its GeForce RTX GPUs support game titles like Wolfenstein: Youngblood and Deliver Us the Moon, customers upgrading their systems will choose an Nvidia product.

Not to be outdone, Advanced Micro Devices (NASDAQ:AMD) talked up its next-generation Big Navi graphics cards. Known as RDNA 2 or Navi 2X, AMD promises to offer better performance, lower complexity and increased clock speeds.

In the near term, Nvidia barely has to worry about competition from AMD’s GPU. AMD is only talking about its RDNA 2-based GPU. Conversely, Nvidia introduced ray tracing months ago and has a significant lead time over AMD. AMD’s RDNA 2 will probably support variable-rate shading. But if Microsoft (NASDAQ:MSFT) confirmed its next-generation console, Xbox Series X, will support this, consumers will buy an Nvidia GPU instead.

Valuation on Nvidia Stock

According to Stock Rover, Nvidia has a margin of safety of 34%. The margin of safety is the difference between Nvidia’s fair value and the current stock price. This implies a price target of $337.53.

Nvidia has a high growth and quality score. It beats AMD in those categories:

Source: Table courtesy of Stock Rover

Investors have an opportunity to hold Nvidia stock for its long-term growth prospects in PC gaming. But it has a moat in growth markets. For example, it is developing AI workloads such as “natural language understanding, conversational AI and deep recommendations.”

Management also highlighted that “Microsoft’s biggest quality improvements made over the past year in its Bing search engine stem from its use of NVIDIA GPUs and software for training and inference, of its natural language understanding models.”

What Are the Risks?

Nvidia forecast a preliminary downside hit of $100 million to its first-quarter revenue outlook due to the impact of the coronavirus. It still forecasts revenue of at least $3 billion and gross margins of at least 65%. Expenses will top $1 billion as the company invests back into the business.

Nvidia could continue its uptrend as the other technology stocks crumble. But even if it faces selling pressure, NVDA stock will bounce back. The company has plenty of long-term growth drivers.

Chris Lau is a contributing author for and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.

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