Nvidia Stock Is Bound to Pass $500 Amid Gaming Upgrade Cycle

The next-gen gaming upgrade cycle is on the horizon

The novel coronavirus pandemic hasn’t slowed down semi-conductor giant, Nvidia (NASDAQ:NVDA). In fact, NVDA stock is up 88% year to date. Nvidia is currently trading near all-time highs, with some analysts predicting a whopping 12-month price target of $500.

Nvidia (NVDA) logo on the indoor wall of a corporate building made of yellow tiles
Source: JHVEPhoto / Shutterstock.com

But now many wonder, can Nvidia continue its momentum heading into its second-quarter earnings call due Aug. 19?

Nvidia’s management team provided a positive outlook for the second quarter in the last earnings call. It guided revenue to be at $3.65 billion, which represents a 41.5% increase year over year. Furthermore, the acquisition of networking specialist Mellanox Technologies will expand the company’s cloud and data center opportunity and is expected to have an impact on its second-quarter revenues.

Finally, Nvidia has also guided for adjusted earnings-per-share of $1.94, which represents a 56.5% year-over-year. While it’s still to be determined, reaching all of these projections would help NVDA stock rise in the months to come.

Rising Data Center Revenues

Nvidia has been building its data center technologies for a while now, and it’s finally bearing fruit. Although gaming represents the company’s biggest revenue source, data center revenues are growing at a much faster pace. In the first quarter of 2020, data center sales were at $1.14 billion. This dwarfs the $634 million figure from the year-ago period.

Nvidia’s new Ampere GPUs also bolster the strength of its data center segment. These GPU’s are a significant step-up in performance compared to the previous generation and can handle artificial intelligence workloads up to 20 times faster. The solid demand for Nvidia’s new GPUs cements the data center segment as the fastest-growing contributor to the company’s top-line. CEO Jensen Huang believes the rising demand for cloud computing will be a significant factor for the company’s data center growth, as it’s an industry that is expected to grow at a CAGR of 17.5% in the next five years.

However, data center growth represents only a minuscule percentage of the overall data center market, which is dominated by Intel (NASDAQ:INTC) having 90-95% of the market share. Nvidia needs to focus on building its enterprise-level clientele, so that it can continue to grow at a healthy pace. The recent acquisition of Mellanox will further consolidate its position in the market.

Next-Gen Gaming Is Around the Corner

The gaming industry has remained resilient amid the coronavirus-led market slowdown. The gaming world is set for a blockbuster second half with the release of the next generation consoles produced by Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). The next-generation consoles present a huge opportunity for Nvidia and other Chipmakers to benefit from the upgrade cycle.

Nvidia’s share of Steam gamers is roughly 73.5%, and only 9% of them own a GPU that matches the performance of the next-generation consoles in the PS5 and the Xbox Series X. Therefore, the release of these consoles could prompt a massive upgrade cycle for Nvidia users to its Turing or the next-gen 7nm Ampere GPUs. These developments could help bolster Nvidia’s Gaming business, which has struggled a fair bit due to supply chain disruptions and closure of retail outlets during the Covid-19 pandemic.

The Valuation for NVDA Stock

semi-conductor peer review
Source: Muslim Farooque

NVDA stock is moving along nicely as the stock gained 15% over the past month. The pandemic has had virtually no effect on the stock’s progress, as it grew 75% since April when the lockdowns were in full effect.

Looking at the numbers in the table above, it’s hard not to say that the company is overvalued with a price-to-earnings ratio and forward P/E ratio of 79.4x and 53.5x, respectively. This is considerably higher than the industry average. However, when you look at its net margins and EBITDA growth rate for the past year, it’s hard not to argue that its valuation is justified.

Analysts have quite a broad range of expectations for NVDA stock’s 12-month price target. The lowest estimate is at $260 and the highest is $500. Mean price targets, though, are notably lower than its current stock price of $453. Consensus price targets for the stock have risen over 35% in the past three months, which suggests that a solid second quarter would continue to push that trend for the coming months.

The Final Word on Nvidia

Nvidia finds itself in a sweet spot heading into the second half of the year. Its data center business is growing at a remarkable pace, and its gaming business is set to get a bump once we get closer to the release of the next-gen consoles.

Additionally, it has several projects in artificial intelligence, augmented reality and virtual reality. All of these will diversify its income streams in the near future. Therefore, NVDA stock is a strong buy.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/nvidia-nvda-stock-bound-pass-500-gaming-upgrade-cycle/.

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