Tech companies such as Alphabet Inc. (ticker: GOOG, GOOGL), Apple Inc. ( AAPL) and Facebook Inc. ( FB) have been making headlines as they push the Nasdaq to new heights. But another tech stock that makes some of the technology that works behind the scenes has been enjoying an excellent year — up about 50% — without getting the spotlight it deserves: Nvidia Corp. ( NVDA).
The company, known for high-performance graphics processing units, processors and semiconductors, has evolved over the last few years, branching into self-driving cars, corporate workstations and data centers. The latter category has proven to be an unforeseen boon for a company that’s growing beyond gaming and into new markets at a rapid rate.
After the company beat expectations with its second-quarter earnings report in August, sending its stock on yet another rally, many investors might be wondering, “Should I buy or sell Nvidia stock?” Here are some points to keep in mind:
— Nvidia at a glance.
— Pros to buying.
— Cons to buying.
— The bottom line: Should you buy Nvidia stock?
Nvidia at a Glance
In late 2018, Nvidia shares crashed after third-quarter earnings disappointed investors and management lowered guidance below expectations for the fourth quarter.
It wasn’t Nvidia’s fault. The company was the victim of its own success, as Bitcoin speculators had spent the previous few months buying Nvidia’s high-performance gaming graphics cards to help mine the cryptocurrency. When the Bitcoin market collapsed, so too did demand for the company’s cards, leading to a sharp decline in sales.
However, since mid-2019, NVDA stock hasn’t stopped climbing, from about $140 in June 2019 to more than $750 in July 2021 before a 4-for-1 stock split.
In no way was Nvidia a bust just because one niche group of customers no longer had use for its products. In fact, the company’s expansion beyond gaming chips and into new technologies such as artificial intelligence, virtual desktops, machine learning and much more has powered Nvidia to new heights.
Nvidia announced the 4-for-1 split that started trading July 20. While stock splits are not material for the stock’s performance and do not change the value of the stock, this event tends to make the stock more attractive to investors. Year to date, the stock is up more than 50% after adjusting for the split.
Pros to Buying the Stock
Nvidia’s expansion into new businesses, including artificial intelligence and data centers, is exactly what has driven the company to record revenue in the company’s fiscal second quarter, which ended Aug. 1.
The company posted revenue of $6.5 billion for the quarter, up 68% from the previous year and up 15% from the prior quarter.
Quarter over quarter, Nvidia saw revenue increases in the majority of its segments, including gaming, data centers and professional visualization. Only the automotive segment fell short, down 1% from the previous quarter, with revenue of $152 million. But that was still up 37% from the previous year.
Nvidia has been expanding its company beyond gaming and pioneering technologies that are enhancing growth. Artificial intelligence has been material to Nvidia’s growth over the past several years, and the company is seen as the dominant player in that market.
“The push into new markets, specifically data center and artificial intelligence, that has been the single biggest driver of growth for this company over the past five years or so,” says Logan Purk, senior research analyst at Edward Jones.
As AI continues to expand in consumer application, that’s a huge opportunity for Nvidia.
In the automotive segment, Nvidia has been collaborating with large automakers. As they work toward developing self-driving vehicles, there is a big revenue opportunity for Nvidia.
The opportunities Nvidia has in the automotive space are twofold, says Matthew Bryson, senior vice president at Wedbush Securities, based in Boston.
The first is supplying their semiconductors in self-driving automotive vehicles. The second is building software systems for those automobiles.
Investors are keeping a close eye on Nvidia’s potential acquisition of privately held Arm Holdings, a British semiconductor and software design company, for a reported $40 billion. This deal could be a game changer for Nvidia because it would further enhance its computing capabilities. However, U.S., U.K. and Chinese regulators could scrutinize such a deal over the resulting concentration of market leadership.
“There are concerns when you take two dominant market positions and bring them together in an environment where there’s a push towards not allowing big companies to form,” Bryson says.
This regulatory pressure gives less confidence about this acquisition. But even if this deal doesn’t go through, Nvidia will still maintain its leadership position in the market. And as a market leader, it’s in a strong position to continue growing.
There’s competition from Intel Corp. ( INTC), Advanced Micro Devices Inc. ( AMD) and startups in this space, Bryson says. “But right now Nvidia defines and controls the majority of the market, while everyone else has small pockets.”
Cons to Buying the Stock
A pressure point for Nvidia is the slowdown in production of semiconductors, which has caused a shortage, posing a challenge for industries on a global scale. Demand for semiconductors is increasing given their widespread applications. And while the shortage hasn’t materially impacted Nvidia, the company has been unable to meet demand from across business segments.
On the data center side and gaming side, Bryson says, Nvidia has not been able to meet demand because it can’t get enough supply from its production partners.
Purk is also eyeing this potential challenge. “We haven’t seen a huge impact yet,” Purk says. “We think that the shortage will likely be felt this quarter and to a degree through the rest of the year.”
Perhaps the biggest drawback to purchasing Nvidia is the stock’s valuation. NVDA stock’s price-earnings ratio, sitting at 93, is highly elevated compared with the industry average of 32. Investors may believe the stock is overvalued and wonder if now is a good time to buy. The stock price is sitting near $200 and is up about 50% for the year as of Aug. 19.
Analysts generally believe the value of NVDA stock will continue to be supported by the company’s strong position in the AI market and its expected robust earnings potential.
“We still see upside in the stock given the company’s greater focus on the data center and artificial intelligence markets. Even though the stock has performed well, we still think the growth opportunity is underappreciated in the marketplace,” Bryson says.
Purk agrees that the stock still has upside. He says that even though NVDA trades at a premium compared with other semiconductor companies, this is justified given Nvidia’s unique position in artificial intelligence markets, which are seen as powerful long-term growth drivers.
“Nvidia stands alone as the closest you can get to a pure-play artificial intelligence name,” he says.
So, while Nvidia is expensive, investors are still paying a premium for the stock because it’s a leader in its industry and over the long term. Analysts say you will see its services expanding into other applications as it continues to solidify its position as a market leader in AI.
While Nvidia’s market position may help secure long-term success in the data center industry, in the near term, investors should be prepared for business to normalize a bit. This might mean shares drop as shareholders take their profits, which may present a better opening for interested investors who missed this year’s run-up.
Bottom Line: Should You Invest In Nvidia Stock?
A record-setting quarter in the midst of a economic recovery and a global semiconductor shortage is nothing to scoff at.
Nvidia’s success this year has been no coincidence as the company has long been one of the leaders in the highly competitive computer components market, and its position in that market will allow the company to continue to grow.
The company is reaping the rewards from smart investments in new technologies such as AI and autonomous vehicles, while simultaneously succeeding in its traditional spheres of business such as gaming.
The biggest problem for investors is the stock’s valuation. In this way, Nvidia is a victim of its own success. After a quarter like this, the company’s valuations have never been higher, which may keep some potential investors away. In the long run, though, the higher P/E multiple might end up being worth it, as Nvidia seems poised to continue its record-setting run.
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Update 08/19/21: This story was originally published at an earlier date and has been updated with new information.