Nvidia (NASDAQ:NVDA), a leading graphics processing unit (GPU) and artificial intelligence (AI) chip manufacturer, has certainly enjoyed a stellar year. Shares of NVDA Stock surged 178% year-to-date, as the company’s revenue surpassed $32 billion. In the previous quarter, Nvidia exceeded expectations with earnings per share of $2.70, 61 cents above estimates. These are the kinds of results growth investors want to see, and bolster the thesis behind owning this name long-term.
I’m of the belief that many long-term investors in Nvidia are unlikely to shift their capital to another company or sector just yet. Valuation has become a concern, with Nvidia now trading at an eye-watering price-to-sales ratio around 35 times. That said, expectations are that Nvidia’s bottom line could continue to explode higher, given the margins on its key high-performance chips and a future that involves a more heavy involvement in software over time.
Here are a few reasons why investors may not want to lose faith in this mega-cap giant just yet.
NVDA Stock Sinks Due to China Chip Restrictions
Many Nvidia investors were already aware of the U.S. government’s actions targeting high-performance chips for AI and other applications due to potential national security concerns. Initially, the U.S. set a mid-November deadline for chip shipments, prompting increased orders from Chinese companies.
However, it was revealed last week that export restrictions came into effect immediately, catching Nvidia by surprise.
Nvidia faces a major setback as new U.S. export restrictions have immediately halted high-end chip sales, potentially canceling around $5 billion in orders. This will impact upcoming financial reports and may lead to lower valuation multiples.
How this translates into long-term cash flow and earnings degradation remains to be seen. Indeed, the geopolitical landscape is an uncertain one right now. Accordingly, there are some unique company-specific and sector-specific risks that may (reasonably) have some investors on the sidelines right now.
Meet Eureka
Nvidia appears to be doing everything it can to vertically integrate into other high-growth areas that are adjacent to its chips. In many regards, the company has done a fantastic job, and this key factor is one I think is often overlooked by many investors in the company (who view Nvidia as simply a chip maker in a relatively competitive space).
The company’s research arm recently developed an AI agent that trained a robotic hand to perform advanced pen-spinning tricks, part of nearly 30 skills robots learned via Eureka, including opening drawers, tossing balls and using scissors.
The Eureka research, shared on Oct. 20, includes a paper and the AI algorithms of the project, accessible for experimentation through NVIDIA Isaac Gym — a physics simulation reference app for reinforcement learning research. Eureka relies on the GPT-4 large language model and was developed on NVIDIA Omniverse, a 3D tool-building platform.
According to Anima Anandkumar, senior director of AI research at NVIDIA and a Eureka paper author, it represents the first stage of new algorithms combining generative and reinforcement learning to address challenging tasks. I think, if anything, this is one intriguing vertical investors need to keep a close eye on.
Nvidia Remains Strong and Resilient
AI technology promises a future of seemingly endless productivity gains, sustaining demand for Nvidia chips. Despite rivals entering the market, Nvidia’s strong presence and market share in high-performance chips should provide enough of a barrier to entry to support the company’s valuation. Nvidia also has a range of non-AI growth avenues, including gaming chips and PC processors.
Nvidia’s high valuation makes it susceptible to corrections on any missteps. Competitors seek to challenge its AI dominance and will continue to do so. Plus, Nvidia’s growth relies on data-center spending tied to AI hype, which might dissipate. The crypto boom, once a tailwind, has become a headwind.
Considering all these factors, I still think NVDA stock offers investors long-term upside potential. It’s really just a matter of what investors are willing to pay today for those future earnings. That’s where most of the digression comes.
On the date of publication, Chris MacDonald 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.
