In the case of a company like Nvidia (NASDAQ:NVDA), it’s easy to look at the global chip shortage as being the primary reason for the NVDA stock performance.
Over the course of a bullish run, it’s easy for investors to fall in line with a single narrative as to why a particular stock is moving forward.
There’s no question that the chip shortage has played a significant role, but if the knowledge that the shortage won’t last forever is causing you to sell NVDA stock, you may want to look at the broader story.
This is not just a semiconductor story, at least not one that’s just about producing chips.
I recently read that NVDA stock was wavering because of bearish comments made by Elon Musk.
Specifically, Musk predicted that the global chip shortage was a short-term event and offering his belief that “we will have good capacity for providing chips by next year.”
I can understand why such a statement would make chip stocks shaky. Semiconductor stocks are notoriously cyclical, and demand for semiconductor chips was increasing prior to the pandemic.
However, when much of the economy was shut down in efforts to mitigate the spread of the virus, demand for chips shifted from sectors like electric vehicles to gaming equipment.
As the economy reopens, manufacturing companies that needed chips must wait in line as semiconductor companies attempt to dial up production to meet pent-up demand.
AI, the Chip Shortage and NVDA
Let’s be clear, this is a tide that is lifting all semiconductor stocks, but it’s hard to ignore that Nvidia has benefited more than most.
NVDA stock is up 64% in 2021 alone. If you go back to the start of the pandemic, the stock is up 318%. For comparison, Advanced Micro Devices (NASDAQ:AMD) and Qualcomm (NASDAQ:QCOM) are up 171% and 119% respectively since the start of the pandemic.
One reason that Nvidia stock is surpassing the growth of its competitors is the strong demand for the company’s gaming processors. And that demand is only going to increase as the gaming world turns to virtual reality.
But that’s just where the Nvidia story begins. The company is also seeing strong revenue growth in the data center arena. Nvidia is currently spending approximately $1 billion on research and development, particularly in the artificial intelligence (AI) market.
Beyond hardware manufacturing, the company has an extensive chip licensing business that it is trying to expand by acquiring ARM. This would remove what some insiders regard as an existential threat to chipmakers. That being some of the largest semiconductor customers developing in-house capabilities. Currently, those companies use ARM for that intellectual property.
All of this is why Dana Blankenhorn describes Nvidia as “a software company masquerading as a hardware company.” I think that’s a concise way of looking at the bullish case for Nvidia. If you’re simply looking at the company as a chip play, you’re missing the bigger story.
Is NVDA Stock a Buy?
All this love I’m throwing at Nvidia may have you convinced I’m about to make a bullish recommendation, and I do believe Nvidia will continue to show investors why it deserves a premium valuation over the long term.
If that’s considered a recommendation to buy, so be it.
However, since hitting its 52-week high in September, NVDA stock may be facing some resistance. The company is not scheduled to report earnings until November. Until then, there’s not much news to propel the stock forward; and there’s also a lot of speculation that could move money into other sectors.
But those are short-term concerns that shouldn’t obscure the larger story that Nvidia is crafting. That’s the story that long-term investors should be reading.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.