In case you haven’t heard, the semiconductor market is back. Forget the novel coronavirus. Forget social unrest. Global end-market demand for semiconductor chips has soared over the past few months, thanks to things like the migration toward cloud computing and a rise in gaming. The industry’s strongest stock, Nvidia (NASDAQ:NVDA) stock, is up 90%. The question on everyone’s mind: will this red-hot rally in NVDA stock persist?
The short answer is yes. For five big reasons:
- Global semiconductor market fundamentals are set to meaningfully improve in the back-half of 2020 and into 2021/22.
- Nvidia’s self-driving business will gain momentum in 2021/22 thanks to 5G-driven advancements in edge computing.
- Nvidia’s gaming business will win big in the back-half of 2020 alongside new-generation gaming console launches and elevated gaming market interest and spend.
- The company’s GPU cloud business will continue to fire on all cylinders as corporations accelerate their digital transformations.
- The valuation on NVDA stock, while stretched, makes sense given all the good things happening at this next-gen company.
Improving Market Fundamentals
Global semiconductor market fundamentals will meaningfully improve over the next six to 18 months thanks to super-charged demand from some of the industry’s most critical end-markets.
It should be no surprise, then, that iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up more than 50% since late March.
Think smartphones, tablets, smartwatches and all IoT devices. Plus, the mainstream standardization of 5G connectivity over the next few quarters will spark an upgrade cycle among current devices like we’ve never seen and introduce a whole new category of smart devices into the market. As both happen, semiconductor chip demand from these will soar.
Now, think the Xbox Series X. Or the Playstation 5. Or the Switch 2. Over the next six to 12 months, multiple next-generation gaming consoles will launch, all of them presumably equipped with never-before-seen technologies like cloud gaming and some AR/VR capability. This rush of exciting new products into the gaming market will create a rising tide across the whole gaming space, and in turn, lead to super-charged semiconductor chip demand from the gaming end-market.
Now, think about all the companies that, because of Covid-19, are accelerating their digital transformations or just embarking on their pivot the cloud. This trend won’t slowdown anytime soon. It will only accelerate.
More and more companies will migrate more of their workflows, processes, communications and data into the cloud, and at a higher frequency. This will supercharge demand for cloud infrastructure, which means more demand for CPUs and GPUs.
In sum, it becomes clear that semiconductor market demand is going to surge higher over the next six to 18 months. As it does, global semiconductor sales will rise, and most semiconductor stocks will rally.
5G Self-Driving Breakthroughs
Nvidia is attractively positioned to benefit from 5G-driven, self-driving technological breakthroughs over the next few years.
Nvidia is the king of the self-driving market. If a company is pushing forward on self-driving, chances are high that they are doing so on Nvidia’s chips.
The mainstream roll-out of 5G over the next few years will, by dramatically decreasing latency and dramatically increasing network capacity, catalyze huge technological breakthroughs in edge computing, machine learning and real-time automation. All of those breakthroughs will come together to spark a giant leap forward for the autonomous driving space.
Of course, this giant leap forward will be accompanied by increased investment into the space. That means more money dedicated to buying Nvidia chips to power self-driving systems.
Net net, the roll-out of 5G over the next few years will provide a significant tailwind for Nvidia’s promising self-driving business.
NVDA Stock to See Huge Gaming Tailwinds
Nvidia is also attractively positioned to benefit from huge gaming tailwinds over the next few years.
As mentioned earlier, the release of multiple next-gen consoles will create super-charged gaming market demand. Boosting that demand will be an increase in isolated behaviors (thanks to Covid-19). The standardization of 5G will provide a particularly large boost to the mobile gaming business by enabling console-quality on smartphones and tablets.
Nvidia is at the heart of this market.
It’s gaming GPUs are considered best-in-breed. AMD’s gaming GPUs rival Nvidia’s GPUs. Sometimes. But Nvidia’s tech is broadly considered superior, and therefore, the company is the graphical backbone of high-quality gaming.
To that end, as the gaming market explodes higher in 2021/22, Nvidia’s gaming business will explode higher, too.
Sustained Cloud Momentum
At risk of sounding like a broken record, Nvidia is also attractively positioned to benefit from cloud adoption tailwinds over the next few years.
Long story short, every company in the world is now migrating to the cloud. These migrations won’t slow down anytime soon. If anything, they’ll accelerate. Importantly, most of these companies will migrate to cloud infrastructure offered by one of the big players in the space, simply because it’s easier and more convenient to do so. I’m talking Amazon (NASDAQ:AMZN). Or Alphabet (NASDAQ:GOOG). Or Microsoft (NASDAQ:MSFT).
All three of those cloud infrastructure businesses – Amazon Web Services, Google Cloud and Microsoft Azure – incorporate Nvidia’s GPUs.
It doesn’t take a rocket scientist to connect the dots.
Increase cloud infrastructure demand at AWS, Google Cloud and Azure, will translate into increased demand for Nvidia’s cloud-focused GPUs.
A Reasonable Valuation for NVDA Stock
The one big knock against NVDA stock is the valuation.
I get that argument. The stock trades at about 46-times forward earnings. Your average semiconductor stock trades at 19-times forward earnings.
But there’s so much going right at Nvidia – and so many avenues for future growth – that NVDA stock deserves a premium valuation.
Indeed, according to my numbers, NVDA stock could be worth as much as $400 today.
Granted, that assumes a best-case scenario for Nvidia over the next several years. But a best-case scenario is becoming increasingly likely given how much this company continues to dominate every important industry, including self-driving, AI, cloud and gaming.
Bottom Line on NVDA Stock
Nvidia stock is, of course, a long-term winner. That long-term winning will be emphasized over the next several months as the company’s and semiconductor market’s fundamentals both significantly improve.
Valuation risks aren’t big enough yet to hold back NVDA stock, so long as the company keeps firing on all cylinders.
Indeed, the company will fire on all cylinders into the end of the year. To that end, I say stick with the rally to $400.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analyst and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN and MSFT.
