Should You Buy Nvidia (NVDA)? 3 Pros, 3 Cons

Should investors buy Nvidia stock?

Nvidia Corp. (ticker: NVDA) designs and manufactures computer graphics processors and related computing technology. Founded in 1993, Nvidia went public in 1999. In the early 2000s, it struck key deals to place its chips in Xboxes and PlayStations. Today, Nvidia’s graphics processing units, or GPUs, power and create the displays on the world’s most iconic devices. Recently, eyes have been on the company as it attempts to power the future of technology — the metaverse, virtual reality, artificial intelligence and data centers. In the past month, NVDA stock has soared more than 40%, as the company appears uniquely positioned to contribute to this uncharted technological future. With such a run, investors might be wondering whether to come along for the ride or avoid the hype. Here are three pros and three cons of investing in NVDA to keep in mind.

Pro: Consistent growth and increasing profitability.

Excluding 2020, Nvidia has experienced positive revenue growth every year since 2015. Revenue from fiscal year 2021, which ended in January, topped $16.7 billion, up 52.7% from 2020 and up 263% from 2015. Along the way, net income soared from $631 million to $4.3 billion. Nvidia’s two major revenue segments are graphics — primarily its signature GPU chips for computers and gaming — and compute and networking — its technology for data centers, autonomous vehicles and AI. In 2021, compute and networking revenue grew a whopping 109% year over year, knocking graphics’ share of total revenue down from 70% to 59%. In the future, expect this segment to drive growth as the company heads full throttle into supporting AI and virtual reality. “NVDA remains our best large-cap growth idea,” says Truist analyst William Stein.

Con: High share price and lofty valuation.

Unlike many stocks, Nvidia’s shares did not take a hit during the coronavirus pandemic. In January 2020, NVDA traded around $60 per share, and today, the stock trades near $300 per share. Such runaway success raises the question of whether Nvidia’s stock price truly aligns with its fundamentals. Nvidia has a price-earnings ratio of more than 100 times the previous year’s earnings, far eclipsing the Nasdaq average valuation of about 30 times. Meanwhile, Intel Corp. (INTC), Advanced Micro Devices Inc. (AMD) and Apple Inc. (AAPL) have P-E ratios of 10, 45 and 26, respectively. In fact, among companies with market capitalization greater than $200 billion, only Tesla Inc. (TSLA), Walt Disney Co. (DIS) and Inc. (CRM) have higher valuations. Of course, trailing P-E is not the only metric to value a company, but such divergence from the market should raise an eyebrow.

Pro: Data centers and artificial intelligence.

Technology evolves exponentially, and so does the amount of data to be processed and stored. While Apple and Intel have started to develop their own chips for personal computing and gaming, Nvidia maintains a massive upper hand at producing chips with the speed and capability to handle the next generation of data. In April, Nvidia announced Grace, its first central processing unit for data centers, which will have 30 times higher aggregate bandwidth compared to today’s leading servers, according to the company. AI LaunchPad, released in June, gives enterprises immediate access to Nvidia’s full suite of AI technology and streamlines cross-data-center management. “We expect Nvidia to continue to experience growth in its cloud and data center business, as demand is driven by AI, deep learning, inference and training,” says Harsh Kumar, senior research analyst at Piper Sandler & Co.

Con: Increasing competition.

As of the second quarter of 2021, Nvidia held 68% of the market share for PC-based GPUs, while Advanced Micro Devices, its biggest competitor, held about 16%, according to Jon Peddie Research. But competition is moving in fast. AMD recently signed a deal to provide Facebook parent Meta Platforms Inc. (FB) with chips to power its data centers and has deals with Alphabet Inc. (GOOG, GOOGL), Inc. (AMZN) and Microsoft Corp. (MSFT). Another competitor, Intel, recently unveiled Arc Alchemist, its own GPU brand, set to release in the second quarter of 2022, which will directly compete with Nvidia. What’s more, Apple’s new MacBooks contain M1 chips designed and built by Apple. Nvidia’s stranglehold on GPU and semiconductor production could suffer if former customers continue going in-house or innovation in this segment starts to suffer.

Pro: Omniverse.

In April 2021, Nvidia CEO Jensen Huang unveiled Omniverse Enterprise. “Omniverse lets us create and simulate shared virtual three-dimensional worlds that obey the laws of physics,” he said at the event. Essentially, the suite of software equips developers with platforms to build three-dimensional objects and engage with them across time and space. Using the technology, automaker BMW has constructed 3D models of future factories, complete with machines, parts and buildings, to optimize its final design plans. Recently, Nvidia partnered with Telefonaktiebolaget LM Ericsson (ERIC), a Swedish telecommunications company, to develop 5G infrastructure. Ericsson will use Omniverse to render virtual cities and identify the optimal locations for placing 5G cells. Since Facebook changed its name to Meta Platforms, the metaverse has been in headlines, but it’s not just avatars and games. With Omniverse, expect Nvidia to focus on harnessing the power of virtual reality to solve real-world problems.

Con: Low dividends.

Like many growth-oriented technology stocks, Nvidia has maintained a consistently low dividend. It first declared a dividend in 2012, but yield has fallen annually and payout ratios have not kept up with the runaway revenue, profit and price growth experienced during the period. In fact, Nvidia has not increased its dividend since November 2018. To close the most recent quarter, Nvidia paid cash dividends of $100 million, or a paltry 4 cents per share, implying a dividend yield of 0.05%. By comparison, Intel and Broadcom Inc. (AVGO), reported dividend yields of 2.7% and 2.6%, respectively. In late July, Nvidia completed a four-for-one stock split to lower the share price and attract a larger group of investors. But so far, it has not hinted at any plans to increase dividends.

Should You Buy Nvidia (NVDA)? 3 Pros, 3 Cons

— Pro: Consistent growth and increasing profitability.

— Con: High share price and lofty valuation.

— Pro: Data centers and artificial intelligence.

— Con: Increasing competition.

— Pro: Omniverse.

— Con: Low dividends.

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