Nvidia (NASDAQ:NVDA) is again a star in scintillating semiconductors. NVDA stock is up almost 134% this year while the widely followed PHLX Semiconductor Sector Index is up “just” 29.51%.
Runs like that often illicit calls that stocks are expensive and Nvidia fits that bill. The chip maker trades at 51.28x forward earnings and 26.21x sales. Numbers like that indicate the growth investors are expecting Nvidia to deliver in arenas it holds dominant positioning. These areas include 3D graphics chips and processors used in data centers.
Data centers and gaming are two of the primary reasons Nvidia is now the largest U.S. semiconductor manufacturer by market capitalization. Those industries are growing and getting some ballast from the novel coronavirus pandemic. While that growth is forecast to continue after the virus is defeated, some analysts are concerned Nvidia is vulnerable to data center and gaming deceleration.
“Our analysis suggests strong cycles in both datacenter and gaming are likely to peak in the next six months,” said New Street Research analyst Pierre Ferragu in a recent client note. “This means we should expect another strong quarter and guide, and after that, it is likely overheated expectations will lead to disappointment and a correction in the stock.”
NVDA Stock Still Hard to Bet Against
Ferragu slapped Nvidia with a “sell” rating. This is bold because 29 of the 37 analysts covering the company have the equivalents of bullish or very bullish grades on the stock.
It’s always prudent to be cautious with high-growth names that rapidly run up. But Nvidia has avenues for allaying concerns about coming slowdowns in data centers and gaming. That is assuming those slowdowns arrive at all. Remember this: Some analysts believe the total addressable data center market could double to $100 billion in 2024 from $50 billion today.
Last month, Nvidia announced a $40 billion deal for Arm, a chip maker owned by Japan’s Softbank. It’s a risky move – it’s by far the largest acquisition in Nvidia history. But there are potentially massive rewards. A key element is the deal expands Nvidia’s offerings, giving it three processors – CPU, GPU and NPU – to capitalize on the artificial intelligence (AI) boom.
AI is still in its nascent stages, but it has profound implications beyond futuristic technologies. It’s at the intersection of myriad disruptive technologies people are using everyday, such as cloud computing and cybersecurity. The purchase of Arm cements Nvidia’s leadership in a fast-growing market with nearly limitless applications. AI does everything from increase the quality of the camera on your smartphone to power cleaning robots in healthcare facilities. Nvidia is even leveraging AI to improve latency on all those video calls.
AI Is Nvidia’s Future
At $40 billion, the Arm acquisition is the headline catcher. But Nvidia offers investors deep reach into the AI space, as highlighted by a recent series of announcements. Some of the topics are prosaic, including fraud prevention for American Express (NYSE:AXP) and improving grammar functions in Microsoft’s (NASDAQ:MSFT) Word.
Others applications are more exotic, including 5G, AI research for healthcare, Internet of Things and conversational AI.
If Nvidia can effectively execute the Arm acquisition, it can offer clients a graphics processing and central processing under one umbrella. This will give the company the most robust AI platform of any semiconductor maker. Importantly, the Arm deal is forecast to add to Nvidia earnings as soon as 2022. The forecast indicates that it’s possible the stock finds its way to $700 as some analysts believe it will. That’s upside of more than 27% from the Oct. 9 close.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.