- Strong growth segments are revealing themselves at NVIDIA.
- Proactive partnerships will play a major long-term role in growth.
- The company is currently ahead of the pack, making Nvidia stock valuations soar.
NVIDIA Corporation (NASDAQ:NVDA), the leading chipmaker of the decade, has been on a roll in the last three years, which saw its stock price nearly triple during the period. The way the company has positioned itself in the established gaming market, as well as the emerging datacenter, automotive and artificial intelligence markets, has made sure that the company keeps posting solid double-digit growth, further pushing Nvidia stock up to trade at more than 40 times earnings.
Why Is NVIDIA’s Valuation So High?
The problem with such a high valuation, even when you are the leader in the segment, is that it leaves room for very little margin of error for the investor. But having multiple revenue streams does help offset the high level of competition, and the constant innovation cycle that is the hallmark of the visual computing segment in which NVIDIA operates.
As you can see from the graph above, growth has accelerated in the last four quarters, and with the company guiding $1.68 billion plus or minus two percent in revenues for the third quarter, a growth of above 20%, it’s clear that NVIDIA is expecting the momentum to continue further.
There are several reasons why NVIDIA is surging. The company is already the leader in the gaming market with more than $781 million in revenues coming from this segment during the second quarter. It is growing at a healthy rate for the company, and with nearly half of the revenues coming from a steady growth segment, NVIDIA’s core revenue stream has solid upside in the medium term.
But the key factor that has pushed NVIDIA’s growth rate over 20% in the last few quarter is the company’s datacenter and auto segment initiatives, which are enjoying huge benefits from NVIDIA’s lead in the Artificial Intelligence-Deep Learning market. As more and more companies push into the cloud, the demand for NVIDIA’s products is on the rise.
NVIDIA is pushing its products into key companies and their cloud divisions, such as Facebook’s Big Sur and IBM Watson. It is actively working with Baidu’s self-driving car project, with Amazon on the SpaceNet initiative for the CIA, with Alibaba, Microsoft and many other large companies.
The momentum they’ve picked up over the past three years is going to drive growth in these two key segments for the next several years.
On the other hand, their chief competitor Intel had been slow-moving until recently, and this has given NVIDIA an invaluable lead in these segments. In the self-driving car market, NVIDIA is working with nearly 80 companies, helping them create their own solutions using the DRIVE PX open architecture.
At this point, it’s hard to say where the self-driving market will be in five years, but with everyone from Tesla to BMW to Audi to Ford and General Motors to Apple investing billions into supporting technologies, NVIDIA’s efforts now will fetch them huge gains in the future. And that’s one of the key reasons why NVIDIA stock is now so highly valued.
The Best Way To Invest In NVIDIA Now
NVIDIA investors know full well that the company is capable of posting record quarters for a long time, and even if they see an occasional dip, it will only provide a great window of opportunity to jump in and add to their positions. But the important thing is to not jump in right away when valuation is so high. Yes, NVIDIA’s upside is strong, but if you want to add value to your portfolio, you’ll add to your position one step at a time, and if possible, only during those minor dips.
As you can see, the Nvidia stock is already trading at 6.5 times sales and more than 40 times earnings. There are several reasons why the company will be able to continue its double-digit growth pace, but at the current price point, as an investor, you won't have any margin of safety. The company has proved time and again that it can take the lead in the market and run away with it, but right now it’s a great company at a really bad price. If you are ready for a long term holding, I would recommend investing small amounts spread over the next five years, because by that time both the cloud industry as well as the technologies behind the auto segment would have become more mature and stable, and NVIDIA, too, will be entering a more mature growth pace rather than the gallop they are on now.
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