NVIDIA Corporation (NVDA), the pioneer of computer graphics processing units, became the 7th largest U.S. company by market capitalization last Wednesday, surpassing Warren Buffett’s Berkshire Hathaway, Inc. (BRK.A) for the first time in history.
The company is aggressively expanding its scope by focusing on the design of chips used in supercomputers, data centers, drug development, and self-driving cars, to make the most of the favorable outlooks for these business sectors.
Although a lot seems to be going right for the company, I remain neutral on the prospects of NVIDIA stock in the next 12 months because of its rich market valuation. (See today’s best-performing stocks on TipRanks)
NVIDIA Eclipses Berkshire Hathaway
NVIDIA stock has gained a staggering 127% this year so far, driven by the robust earnings growth reported by the company in each of the last three quarters. NVIDIA’s strong financial performance was driven by its entry into new markets such as Automobile, Content Streaming, and Cloud Gaming.
With a market capitalization of approximately $770 billion at the time of writing, NVIDIA ranks behind Microsoft Corporation (MSFT), Apple, Inc. (AAPL), Alphabet Inc. (GOOG), Amazon.com, Inc. (AMZN), Tesla, In. (TSLA), and Facebook parent Meta Platforms, Inc. (FB), in the list of most valuable U.S. companies.
Right behind NVIDIA is Warren Buffet-led Berkshire Hathaway, with a market capitalization of approximately $660 billion. The company’s current market value exceeds the combined market value of Intel Corporation (INTC) and Broadcom, Inc. (AVGO), two of NVIDIA’s closest rivals.
Quarterly Earnings Recap
In the second quarter of Fiscal Year 2022, Nvidia earnings soared 282% while revenue increased 68% year-over-year. The company reported record quarterly revenue from its key business segments such as Gaming, Data Center Solutions, and Professional Visualization.
Gaming revenue was up 85% from a year ago, aided by the sale of GeForce RTXTM 30 Series, while Data Center and Professional Visualization revenues increased 35% and 156%, respectively.
The cryptocurrency mining processors launched earlier this year generated $266 million in revenue in the second quarter as well. This is a noteworthy development as the company is increasingly becoming one of the go-to solutions providers for the booming crypto economy.
NVIDIA has a sound balance sheet along with a conservative financing policy, which is encouraging. At the end of the second quarter of Fiscal Year 2022, the company had $17.5 billion in total liabilities and nearly $19.7 billion in cash and cash equivalents.
The Outlook Is Promising
Facebook’s capital-intensive plans to pursue the opportunities available in the virtual reality sector are likely to benefit NVIDIA in the coming years. The company is one of the top suppliers of graphic processors to Facebook. NVIDIA is positioning itself as a best-in-class technology solutions provider for Artificial Intelligence and Machine Learning applications. This is a good move because many big tech companies are keen on tapping into these sectors.
Wells Fargo analyst Aaron Rakers recently wrote that NVIDIA will most likely announce the general availability of its Omniverse Enterprise offering at its GTC conference. This will attract more customers who are focused on the Metaverse.
NVIDIA has partnered with NIO Inc. (NIO) to develop its first autonomous driving vehicle model. The deliveries of these vehicles are expected to commence in the first quarter of next year. This will be a breakthrough development for NVIDIA, as the expected success of the NIO partnership will help the chipmaker land many new clients who are looking to develop autonomous vehicles.
With the reveal of NVIDIA’s advanced CPU Grace, the company’s potential to offer a more complete system for data centers will be enhanced. The launch of Grace directly challenges processor giants Intel and Advanced Micro Devices (AMD), and the company seems well-positioned to gain market share in the fast-growing Data Center market.
The booming Cloud Gaming industry, which is expected to grow at a CAGR of 43.2% through 2026, will be a growth driver for the company as well. Although NVIDIA currently is a key player in this industry, there will be stiff competition from rival services such as Google Stadia, Microsoft Xbox Network, and Amazon Luna.
Wall Street’s Take
Turning to Wall Street, NVIDIA has a Strong Buy consensus rating, based on 22 Buys and one Hold assigned in the past three months. The average NVIDIA price target of $245.81 implies 19.7% downside potential.
The stellar performance of NVIDIA stock has a lot to do with this expected decline in the stock price in the coming months. Prudent investors are likely to wait on the sidelines for a better opportunity to invest in this high-growth chipmaker.
NVIDIA Corporation is tapping new industries to secure growth, and the company has already partnered with many big tech companies to expand its scale.
The company, however, is richly valued in the market at a forward earnings multiple of 73 in comparison to the sector median of 25, which highlights the risks associated with investing in NVIDIA stock today.
Disclosure: At the time of publication, Dilantha De Silva had an ownership stake in Meta Platforms, Apple, and Microsoft.
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