One of the top chipmakers that investors continue to buy heavily right now is Nvidia (NVDA). This company’s stock price continues to hover around all-time highs, as supply chain concerns related to chip production continue to provide top-tier chip makers such as Nvidia with momentum right now.
Nvidia’s valuation is quickly approaching the $1 trillion level, a significant psychological threshold that only a handful of U.S. companies have been able to surpass. Whether Nvidia ultimately gets there in short order will be intriguing to watch.
Of course, bulls on Nvidia point to the company’s major business segments, including Handheld and Consumer Electronics, Media and Communications Processors, and Graphics Processing Units, as drivers of the growth thesis around this stock. A true “picks and shovels” play on technological adoption, Nvidia appears to be a cutting-edge stock that bulls can’t get enough of.
That said, given how far and how fast NVDA stock has run, there are valuation concerns. This company’s growth hasn’t been unnoticed, which is a great thing for investors. However, whenever a stock runs like this, concerns about a price correction can surface.
Given various macroeconomic headwinds that may materialize in the near term (think, Central Bank tapering, slowing demand, or an outright recession), Nvidia remains a high-growth stock with tremendous upside potential, but also significant risk relative to the market.
I’m currently neutral on NVDA stock right now, considering these concerns. That said, there’s certainly a strong bull argument to be made for this stock right now. (See Analysts’ Top Stocks on TipRanks)
Let’s dive into what investors may want to be watching with Nvidia currently.
Gaming Business Poised for Long-Term Growth
For chip-maker Nvidia, the most critical catalyst for this company happens to be growth in gaming. Indeed, over this past quarter, the largest spruce of revenue was its gaming segment, which accounted for approximately 45% of the company’s top line.
That’s significant.
What’s more, gaming-related chip revenues rose 42% on a year-over-year basis. This was tied to Nvidia’s push to ramp up GPU supplies to meet enormous end-market demand.
Nvidia’s management team also stated that there was a sharp jump in demand for its laptop GPUs from the prior-year period. The rise in high-end laptops sales was responsible for this.
With an 83% market share, Nvidia is undoubtedly a dominant force in the graphics cards space. The discrete graphics card market is anticipated to register $44 billion in annual sales by 2023, compared to $29 billion in 2020. Hence, investors of this graphics semiconductor supplier can expect a sharp growth in the firm’s gaming revenue.
Taking Steps to Continue Its Domination
Nvidia is striving to dominate the gaming space, which remains the most critical driver of Nvidia’s business. Consistently bringing out better and faster chips is integral to Nvidia maintaining its grasp on this high-growth segment. For investors who have followed Nvidia over the years, it appears this company has yet to disappoint.
The company’s focus on improving its market share in the GPU segment has worked wonders for Nvidia’s recent earnings. The company’s recently-announced next-generation graphic cards, code-named Ada Lovelace (after the famous mathematician), have many investors excited.
Expectations are that these graphic cards could be ready to hit the market next year and could be twice as fast as current cards. While the current generation Ampere cards from Nvidia are based on an 8nm manufacturing process, these are anticipated to be based on a 5-nanometer (nm) manufacturing process.
Indeed, this could be a massive catalyst for this fast-growing company. Analysts factoring in the potential growth from these updated cards suggest Nvidia could grow its bottom line by 40% next year. Such bottom-line growth could propel the company’s valuation even higher and allow Nvidia to grow into what many believe is an untenable valuation right now.
Wall Street’s Take
Turning to Wall Street, Nvidia has a Strong Buy consensus rating, based on 22 Buys and two Holds assigned in the past three months. The average Nvidia price target of $358.36 implies 7.4% upside potential.
Analyst price targets range from a low of $285 per share to a high of $400 per share.
Bottom Line
Looking at Nvidia from a fundamentals perspective, there’s certainly appetite from investors to take an aggressive approach to forecast future earnings and work off of forward-looking numbers. On that basis, perhaps this company’s valuation makes sense.
Of course, Nvidia will need to continue to execute. Thus far, the company hasn’t disappointed. However, there’s always execution risk with any stock, and investors need to consider all the possible outcomes in the years to come.
For now, the outlook undoubtedly is bright for Nvidia. Until growth in gaming slows down, this is a stock that’s likely to remain a top pick for long-term growth investors.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.
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