Like all semiconductor stocks, Nvidia (NASDAQ:NVDA) is frequently regarded as a cyclical stock. However 2020 is making this group one of the most profitable segments for investors. NVDA stock is up nearly 93% for the year. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up over 20% in 2020. That far outpaces the S&P 500.
What are the catalysts for semiconductor stocks? At this point, the better question may be what isn’t a catalyst for this group. The 5G build-out is becoming a reality despite the pandemic, and the work-from-anywhere trend will be the reality for many Americans.
As I wrote in May, Nvidia is seeing strength in gaming and data centers. And these two segments look to be in competition to see which one will take the credit for pushing Nvidia stock higher.
NVDA Stock Looks Like a Strong Buy
The Covid-19 pandemic forced Americans to shelter in place. As a result, demand for video games and the devices that power them went through the roof. Investors expected this trend would create surging demand for the company’s graphic processing units (GPUs).
Nvidia did not disappoint. The chip maker delivered results that should continue to power Nvidia stock well into the second half of 2020 and beyond. Texcan Gecgil points out a key driver for Nvidia’s gaming business:
And Nvidia will be getting a boost from a new gaming chip that is launching on August 31.
The Mellanox Purchase is Paying Off
In the first quarter, Nvidia started seeing benefits from its $6.9 billion purchase of Mellanox, the data center networking company. The deal initially produced cautious optimism among investors. On the one hand, a deal of this magnitude was out of character for a company like Nvidia. On the other hand, the company had to have a presence in this market.
When the novel coronavirus first became a pandemic, it slowed data center construction. That pause has ended and the industry is back to building again. In fact, the U.S. data center market is projected to grow at a compound annual growth rate of over 1% through 2025.
The growth of data centers is being fueled by two principles. Moore’s Law describes the growth and capacity of integrated circuits. The corollary to Moore’s Law is Bell’s Law. This states that every decade a hundredfold drop in the price of processing power engenders a new computer architecture.
What this means is that companies like Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) need more data centers to house the big data and vast computing power in the “cloud”. And they’re not alone. In the United States, over 25 states are offering tax incentives for companies to build new data centers.
NVDA Stock Looks Like a Strong Buy
If there’s one potential headwind for Nvidia it would be that this is a very competitive segment. Companies like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) are formidable competitors. However, at this time, there seems to be more than enough business to keep everyone happy.
The recent run-up has Nvidia stock trading at 46x 2021 earnings. As Vince Martin points out that’s pretty impressive for a “boring” chip stock. But that’s also the nature of this red-hot segment. Technology is continuing to evolve. And as it does, the demand is increasing.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.