In late 2018, the situation was looking bleak for NVIDIA (NASDAQ:NVDA). The crypto boom had fizzled and the company was having issues with its next-generation gaming systems.
But of course, NVDA stock would begin a powerful bull run. The shares have since gone from $133 to $527, bringing the market capitalization to $325 billion. Consider that NVDA stock now has a higher valuation than the formidable Intel (NASDAQ:INTC).
Yet since late summer the stock price has run into some resistance. Part of this was that investor expectations had gotten too optimistic. But there was also the rotation away from some of the red-hot tech plays. A big catalyst for this was the promising results from the Covid-19 vaccines from companies like Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA). In other words, there will likely be more economic stability next year.
So then what now for NVDA stock? Is it a buy here? Let’s take a look:
The Growth Drivers
The growth story still is very much intact. The company’s core technology – the GPU (Graphics Processing Unit) – has proven to be quite effective versatile. The technology allows for processing huge amounts of data in parallel at a low cost. This has certainly been critical for gaming applications. But GPUs are also the standard for high-end analytics and AI.
As seen with the latest earnings reports, the businesses are running at a torrid pace. In the latest quarter, the gaming segment saw revenues jump by 37% to $2 billion. The Covid-19 has meant that the industry has seen an acceleration in usage. But another driver is the new cycle for consoles from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE).
“New products – like GeForce RTX GPUs, NVIDIA Reflex, NVIDIA RTX — have been met with critical and customer acclaim,” said Brandon Reed, who is a CFA and Portfolio Manager at Mitchell Capital Management. “NVIDIA has continued to create realities from what many gamers have only dreamed to be possible from their consoles and PCs.
Demand for new products far outstrips supply by many months, and new ways to game and connect, such as with NVIDIA Broadcast GeForce NOW, will propel engagement for a company that will increasingly be known as a multi-pronged play on gaming, content, and connectivity.”
Although, the real star has been the data center business. In the quarter, the revenues soared by 162% to $1.9 billion.
The company has been able to get adoption for its A100 GPU for the cloud instances of Amazon (NASDAQ:AMZN), Oracle (NASDAQ:ORCL), Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google Cloud and Microsoft’s Azure. There has also been the launch of the DGX SuperPOD Solution for the enterprise, which is a turnkey AI infrastructure.
Another part of the strategy has been to ramp up M&A. The $7 billion deal for Mellanox has bolstered the networking and high-end computing capabilities for the data center.
And then there is the proposed $40 billion acquisition for Arm. The company’s chip technologies are prevalent in most smartphones across the globe and will be critical for next-generation AI systems.
Bottom Line On NVDA Stock
NVDA stock does have some notable headwinds, though. The competition is getting more intense, such as from Advanced Micro Devices (NASDAQ:AMD). There are also issues with the supply chain in China, as well as potential regulatory pushback on the Arm deal.
But perhaps the biggest issue for NVDA stock is the nose-bleed valuation. Consider that the shares trade at a hefty 46X times forward earnings. This is certainly stretched for a chip operator.
Then again, in today’s environment, it’s tough to find growth companies that are cheap. And besides, when it comes to a world-class player in a fast growing industry – with multiple secular trends – a premium is deserved. So it seems reasonable for the momentum to continue with. And while the returns for NVDA may not be on par of what we’ve seen in the past couple years, they should still be competitive.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
