Nvidia (NVDA) stock has been on an incredible run of late. The company’s stock has given investors a 1,300% return over the last five years, and its most recent quarterly earnings report just happened to be a record-breaking one too, smashing multiple all-time revenue figures and delivering huge bottom-line profits as well.
But the company’s price hike has come at a cost. Nvidia’s current valuation is high, and some investors might be wary buying at the present time. However, Nvidia still has more to give, especially with many promising business lines likely to drive growth in the future.
That said, with its proposed takeover of British rival Arm Holdings just one potential catalyst that could go wrong in the near future, is there still a bullish case to be made for this stock?
Nvidia’s Revenue Opportunities
The growth trend in computing and online gaming continues apace, which is good news for Nvidia as it’s one of the industry’s leading suppliers of PC gaming hardware.
The number of users involved in gaming is expected to rise from 1.75 billion in 2020 to almost 1.86 billion in 2024, with GPU sales also spiking upwards from $23 billion in 2020 to $54 billion in 2025.
Hardware sales for the high-end PC gaming market are predicted to grow 20% each year, for which Nvidia takes about 80% of all revenues from the space.
Nvidia’s gaming segment accounts for around 47% of the company’s total revenue, spurred on by a rush for GPUs which is currently outpacing present available supply.
Indeed, NVDA’s gaming revenue has increased 85% year-on-year to a record $3.06 billion, helped along in part by the high demand for its 2020 issue GeForce 30 series Ampere micro-architecture graphics processing units.
Also promising is the fact that only 20% of Nvidia users have yet to upgrade to the new GeForce RTX 3080 and RTX 2080 GPUs, despite the Ampere GPUs having been in shops for over a year now.
There’s even the NVIDIA GeForce RTX 40 Series graphics cards set to come onboard too, which won’t be released before the end of 2022. These improved GPUs will offer a 2x jump in performance, and will run on Nvidia’s Ada Lovelace GPU architecture.
The timetable for these latest upgrades, and the extent of the market yet to be tapped, guarantees NVDA’s gaming business has healthy growth ahead of it for many years to come.
Nvidia’s next best performing segment is its data center operation, which together with its gaming wing made up 83% of the company’s revenues last quarter. With customers such as Alphabet’s Google (GOOG), Microsoft (MSFT) and Amazon (AMZN) on its books, NVDA has seen revenue for this segment grow 16% quarter-on-quarter, and 35% year-on-year to $2.4 billion.
The data center business has seen its most significant growth in the Artificial Intelligence or AI domain, as Nvidia’s technical dominance in this sector comes to the fore. Adoption of its Base Command and Fleet Command offerings by enterprise customers have helped capitalize on what is a huge growth opportunity.
The President & Chief Executive Officer of Nvidia, Jensen Huang, said during the company’s latest conference call that he believes that the market here might “represent billions of dollars of profit inputs” as the collection of enterprise customers link tens of millions of servers with Nvidia’s GPUs and upend the industry.
Nvidia’s technology is also predominant in the supercomputer space too, where almost 70% of the world’s most powerful supercomputers feature the company’s chip somewhere in their construction.
This is further good news for NVDA, as the AI chip market is slated to expand 45% annually to 2025, giving the company more prospects for growth in the future.
Nvidia Record Breaking Quarters Continue
Nvidia has been delivering on quarterly earnings reports for quite some time now, beating revenue estimates for 10 consecutive quarters in a row. The latest second quarter results were especially good as the company smashed previous segment revenue records on three fronts.
NVDA reported a business wide record total revenue of $6.51 billion, which was up 68% from the previous year. Gaming revenue also broke records at $3.06 billion, an 85% increase year-on-year, and, finally, record Data Center revenue was up 35% at $2.37 billion.
Net earnings per share also rose 276% from the year before, or 24% from the previous quarter, while its gross margin grew 600 basis points to 64.8%. The company also paid $100 million in quarterly cash dividends for the period.
What Could Go Wrong?
Despite such a good earnings season and some great growth drivers behind it, Nvidia does face two key risks. These are:
- its upcoming acquisition of fellow semiconductor maker Arm, and
- a potential collapse in the cryptocurrency mining space that has been a strong tailwind for Nvidia recently.
On the acquisition front, the latest remarks from Tesla’s Elon Musk opposing the purchase have echoed concerns from Samsung, Amazon (AMZN) and Qualcomm (QCOM) about the deal. The takeover is still at its early stages, but a rumored European Union antitrust probe and similar UK government investigation could cause problems further down the line.
As for the crypto issue, Nvidia noted in its quarterly filings that its revenue from Cryptocurrency Mining Processors actually dropped 33% below its own guidance, to $266 million.
It predicts a “minimal contribution” from this cash source in the future, but given that the digital currency space is expected to grow in the coming years, it remains to be seen how exactly this will pan out.
Valuation: The Elephant In The Room
The biggest obstacle for investors has to be NVDA’s present valuation, which is high to say the least. The company is actually now the world’s most valuable chip maker, and that’s not without good reason. But does the firm have the power to grow revenues at a rate to match its market worth?
At the moment, Nvidia’s trailing twelve month revenue growth stands at 68%, but Wall Street experts predict this will slow to 38% over the coming year. Its Price/Sales multiple is also high at 25x, which compares poorly to the Information Technology median of just 4x.
However, Nvidia’s business couldn’t be in better shape. Secular tailwinds from the growth of PC gaming, and catalysts from the roll-out of upgraded products and major future acquisitions, should all play to the company’s favor.
For cautious investors who already own Nvidia, the stock is definitely a hold. But for those who recognize the underling value in the brand, and want to open a position in a business with exposure to high-growth markets opportunities, Nvidia is most certainly a buy.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.