Is Nvidia a Good Choice Now?

Nvidia Corporation (NVDA) is one of the hottest tech stocks in the market at present, with a staggering 750% gain in the last three years. Though the final month of 2021 has been a bit unpleasant for the stock as it has lost a chunk of its value, Nvidia has already started on its journey towards recovery. The market is also bullish about this stock because this graphic specialist still has an incredible number of opportunities to grow its revenues and expand its margins over the coming years.  

Nvidia is a globally recognized designer and seller of computer graphics processors, chipsets, and related multimedia software. It primarily operates through two segments: Graphics, and Computer & Networking. The Graphics segment designs graphics processing units for the gaming and professional markets around the globe, while the Computer & Networking segment sells chip units to the mobile computing and automotive markets.  

Nvidia has been dominating both the markets in which it operates. To give context, its market cap has grown at a much faster pace compared to that of Apple’s (AAPL) in the past decade. However, because of it has grown so fast, the biggest challenge Nvidia is facing these days is justifying its rich valuation. Considering its future prospects, the markets believe the company can successfully preserve the value it has created over the years for itself.

William Stein of Truist Financial is one of the analysts who think the same. He has raised his average price target to $389 from $360 and has maintained a Buy rating on the stock. Moreover, he has stated that Nvidia warrants a higher multiple and that its dominancy in the semiconductor and software technology space will drive its structural growth.

Moving Towards a Metaverse

The Metaverse warrants the usage of various technologies like augmented reality, virtual reality, and video streaming, and requires parallel and superfast computations. Nvidia, through its industry-leading high-throughput graphics processing unit (GPU) chips, has made a big push into metaverse applications. The company has a range of next-generation hardware technologies for supporting the metaverse like its GPU’s or the recently launched Grace CPU or be it the next-generation Bluefield data processing unit.

Moreover, going beyond hardware, Nvidia has also come up with its Omniverse, and has introduced the Omniverse Replicator synthetic-data-generation engine and Omniverse Avatar. Omniverse is a scalable, multi-GPU, and real-time software-development platform, the development of which is aimed at enabling real-time collaboration amongst the global 3D-design teams who are working on multiple software platforms.

As per Gartner estimates, AI software spending is about to reach $62 billion next year, which is an increase of 21% over 2021. Nvidia has said over 700 organizations are evaluating the use of its Omniverse so it would be a great opportunity if the metaverse takes off.

Strong Financial Performance

Nvidia has been an excellent performer over the past few years. The company’s gross margin has steadily improved over the past 10 years, resulting from the shift in its sales to the more powerful graphics processors that command higher prices across gaming and data center segments. In the coming years, the newly growing software avenues (e.g., license fees from Nvidia AI Enterprise and Omniverse) should also contribute to improving its gross margin.

As per its latest third-quarter financials for the fiscal year 2022, Nvidia’s financials showed that, within the first nine months of 2021, it has achieved a revenue of $19.3 billion, which is 65% higher compared to the prior-year period. Its earnings per share went up to $3.12 per share, indicating a massive 81% growth.

Besides for that, in the three-month period ending 31^st October 2021, there has been a 91% improvement in the company’s operating income, and sales for the quarter have grown by more than 50%. Revenue from its Data-center segment saw a 55% growth, while Gaming Chip revenue grew by 42%. 

The Tipranks’ Stock Investors Tool indicates 24 out of 26 analysts have given Nvidia a Strong Buy rating, whereas the remaining two have suggested a Hold on its shares. The highest price target for the stock is $400, which is a potential upside of a little over 38% from its December 22 closing price of $290.75. The average Nvidia price target is $360.17, which is a healthy 16.4% upside on the stock.

Multiple Growth Aspects

Even without the metaverse opportunity, Nvidia still has a lot of room for growth. The pandemic had fueled demand for the company’s chips in home computing, video games and data centers, to the extent that it led to a global shortage. To curb this shortage, Nvidia is now working towards increasing its GPU Supply and expects to ease the shortage by the middle of 2022.

Other than that, the PC market forecast for 2022 suggests the demand for gaming computers is expected to remain strong, as the overall computer graphics market might reach $138 billion in value. Gaming PCs are expected to hit $37 billion in revenue in 2022. Nvidia, having access to an over 80% share of the market, is in a perfect position to grab the benefits.

Also, as cloud gaming is growing around the world, Nvidia’s new cloud gaming service could potentially become another driver for the company’s growth. Furthermore, crypto demand would also indirectly benefit the company, as Nvidia chips are used in the mining of cryptocurrencies. 

Nvidia has all the qualities of a top-performing stock and can continue to remain a top growth stock in 2022 and beyond. On a fundamental level, the company’s earnings and sales are showing good growth. Also, its adoption of metaverses and cryptocurrencies could enable it to continually churn out healthy growth rates in the coming times as well. Therefore, investors shouldn’t be concerned about the short-term price fluctuations in Nvidia, and might want to consider this stock.

Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article.