Nvidia Corporation (NASDAQ:NVDA) has outperformed the broader market, affirming its status as a top growth stock. The stock has more than doubled in value over the past year, delivering significant gains to investors. Solid fundamentals have supported the impressive performance, key among them being strong demand for the company’s graphic processing units or GPUs, which are finding great use in video games and data centers.
Solid growth metrics
Having started the year at $230 a share, the stock ended the year at $530 a share, a 100% plus gain that came on strengthened investor confidence about the company’s growth metrics and long-term prospects.
Amid the impressive performance, the graphics chip powerhouse looks set to maintain its momentum in 2021, as the catalysts for accelerated growth are still in play. Strong demand for the company’s graphics cards for use in video games and data centers all but affirms what could turn out to be a record-breaking year on sales.
A record-breaking fourth quarter capped a break-out year for NVIDIA computing platforms, all but affirming its solid growth metrics amid a challenging macro environment owing to COVID-19 shocks. The quarter’s revenue was up 61% year over year to $5 billion, mostly driven by record revenues in the gaming and data center platforms segment. In contrast, analysts were expecting revenues of $4.82 billion.
Nvidia premium valuation
Similarly, net earnings topped estimates on increasing 64% to $3.10 a share against $2.81 expected. The solid financial results explain why Nvidia is one of the most expensive stocks in the market, given the amount of interest it continues to elicit.
Nvidia stock is currently trading at nearly 98 times its trailing earnings. With a price-to-earnings ratio of 53, the stock is not cheap by any standards, given that its five-year average forward earnings multiple stands at 36.
While the stock looks expensive, several things justify the high valuation and why it was the stock to watch in 2020.
Strong GPU demand
Strong demand for the company’s graphics cards is one of the reasons to remain bullish about Nvidia prospects. The company is already finding it difficult to keep up with the overwhelming demand from data center markets and video game developers.
With a dominant market share of about 80% in the graphics cards business, Nvidia’s edge in the sector is more than safeguarded and poised to be a key driver of the bottom line in the years to come. The massive market share positions the company to enjoy a high pace of revenue growth in 2021 and one of the reasons to be bullish about the stock. Nvidia is already working to scale up its supply chain to meet the ever-growing demand.
The company’s gaming business has been in fine form and is not expected to slow anytime soon. The sale of graphics processing units for powering various video games should continue to edge higher as part of the annual upgrade cycle, translating to booming business for the company.
The gaming division is expected to benefit from pent-up demand in 2021, translating to more revenues for Nvidia as it controls 80% of the market.
Data center multi-billion opportunity
In addition to the gaming division, Nvidia’s data center business also benefits from the strong demand for data center accelerators. The unveiling of the Bluefield-2 DPU might as well have uncovered a new multibillion-dollar opportunity for the company.
The chip is poised to strengthen its hold of the data center market thanks to its massive computing power that allows it to execute tasks at a fraction of the cost quickly. Like the graphics card, the DPU expands its footprints into a massive market valued at over $23 billion.
Clean energy driven opportunity
With the Joe Biden administration increasingly pushing for clean energy, Nvidia could be a big beneficiary on this front. Nvidia data center hardware is poised to elicit strong demand given its ability to handle AI and other data-intensive tasks pertaining to the handling of renewable energy and distribution.
Many companies in the energy sector are increasingly using the company’s hardware to enhance their cloud computing operations. Climate change goals as its next-gen cloud computing devices have proven to be highly energy efficient.
Cryptocurrency prices powering to record highs might as well present yet another exciting opportunity. With crypto prices at record highs, mining is once again gathering pace amidst renewed interest.
Nvidia processing units are some of the most cherished in the business as they can be programmed to enhance crypto mining operations. Demand for the RTX 30 series GPUs looks set to edge higher as demand for crypto mining rigs increases. The crypto mining spree presents yet another avenue for Nvidia to generate sales on the sale of GPUs.
The pending ARM Holdings acquisition is another development yet to be factored into the company’s long-term prospects. With the acquisition, Nvidia is poised to become a leader in computing development.
ARM, being a leading chip technology licensor, is poised to strengthen Nvidia’s revenue base even further given that it makes a good chunk of its money from royalty payments from companies that license its products. ARM chips are finding great use in autos, data centers among a myriad of electronics such as smartphones affirming their credibility in the industry.
The addition of ARM is poised to strengthen Nvidia’s research and development unit, conversely, gain access to industry-leading expertise in terms of workforce and technology. ARM is poised to bring about 13 million-plus developers that currently work within its ecosystem. The influx of engineers should strengthen Nvidia’s competitive edge in the industry.
While Intel has dominated the chip architecture for decades, Nvidia could as well be on the course to toppling the status quo. Nvidia has already made clear its intention to bring more AI to its ecosystem and extend AI to all points in between the network and data center.
Nvidia is in a phase of robust growth, going by the solid numbers it posted for its most recent quarter. Strong demand for GPUs to power autos, cloud gaming, video games, and data centers all but affirm the solid underlying fundamentals.
With the company controlling 80% of the graphics cards market, it remains well-positioned to generate significant revenues in 2020. Besides, the ARM acquisition strengthens the company’s competitive edge and product line to enhance the revenue base.
As it stands, Nvidia is on course for another record-breaking year, given the booming GPU business. Similarly, the stock looks set to continue edging high.