We might be in the midst of the worst pandemic in a century, but it doesn’t seem to be slowing down premium graphics chipmaker Nvidia (NASDAQ:NVDA) stock all that much.
In fact, NVDA stock is regularly hitting new all-time highs these days, and some of the buzz built into the stock price is due to its help in the fight against Covid-19.
Nvidia’s graphics chips do more than just power video game consoles and gaming PCs. They are also used in many of the biggest tech trends of the past decade, including data center management, cryptocurrency mining and artificial intelligence.
And more recently, Nvidia’s chips have been used by researchers studying the genome of the novel coronavirus. And taking it a step further, Nvidia recently asked gamers using its chips to donate spare processing capacity to the effort.
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We should all hope that Nvidia’s chips prove useful in understanding and fighting the virus, and it is certainly good publicity for the company that its graphics chips are popular among medical researchers.
But coronavirus work alone is unlikely to move the needle all that much on NVDA stock. The far bigger story on NVDA stock remains the company’s strong positioning in artificial intelligence and in its strong balance sheet.
Nvidia has no net debt and just shy of $11 billion in cash on the balance sheet. It’s precisely this financial strength that allows Nvidia to continue to invest in its business, even when the capital markets are under stress.
Nvidia’s Revenues Are Rising Again
NVDA stock was something of an investment fad back in 2017 and 2018. This was the peak of the cryptocurrency bubble, and aspiring miners around the world were buying Nvidia chips to mine for Bitcoin and other cryptos.
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Revenues started to dip in late 2018 and didn’t find a bottom until late last year. The recent sales surge took place before the novel coronavirus became the focus of medical researchers.
It wouldn’t be a surprise at all to see a significant bump in sales over the next few quarters due to increased demand from medical researchers (Nvidia releases first quarter results on May 21.)
In my view, the biggest and most reliable source of new demand for Nvidia’s chips should come from the continued rise of the cloud. Cloud computing was already the biggest trend in corporate of the past decade.
But with most white-collar workers currently working from home, and with flexible work arrangements likely here to stay, moving more and more processes into the cloud has become an urgent priority.
Nvidia’s chips are a big part of that solution. In fact, Amazon (NASDAQ:AMZN), whose AWS is the undisputed leader in cloud computing, has specifically highlighted its use of Nvidia chips as a major competitive advantage.
NVDA Stock Enjoys Fat Returns on Assets
In tech, most of the profits tend to go to software. Hardware producers are often lower-margin, capital-intensive businesses that are viewed more as commodity peddlers than anything else.
Well, Nvidia enjoys a return on assets that would rival a software company.
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Nvidia’s return on assets has come down from its crypto-boom highs, but at 22.97% remains exceptionally high. As a point of reference, leading CPU maker Intel (NASDAQ:INTC) has a return on assets of just 15.93%.
NVDA stock is by no means cheap at current prices. It trades for 71 times trailing earnings and 43 times expected forward earnings. But that’s OK. Quality growth stocks like Nvidia rarely go on sale, and the trends sending the shares higher in recent years are real and durable.
You should keep any investment in Nvidia at a modest size, of course. Chipmakers are notoriously volatile, and NVDA stock is no exception. But if you’re looking for plays on the continued growth of cloud computing and artificial intelligence, NVDA stock makes the cut.
Charles Sizemore is the principal of Sizemore Capital Management, an investments firm based in Dallas, Texas. As of this writing, he did not own shares in any of the aforementioned securities.
