Nvidia (NVDA) Stock Analysis and Forecast | Best AI Stock?

Updated: 13th Jan 2022 Written by Sean Graytok
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Nvidia stock has been on a historic run — but is NVDA still a buy after running this hot for this long?

Let’s find out in this Nvidia Stock Forecast & Analysis.

What is Nvidia?

Nvidia is a technology company that manufactures graphics processing units (GPUs) and system on a chip unit (SoCs) for the professional markets.

GPUs and SoCs perform rapid mathematical calculations that make high-performance computing possible.

Nvidia’s GPUs and chips enable various technologies beyond gaming, such as artificial intelligence, data center capabilities, robotics, and cryptocurrency mining.

Nvidia is often considered a “pick and shovel” play amongst the best AI stocks – an investment strategy of buying stock in the tools or services an industry uses to produce a product.

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Nvidia Stock Investment Potential

#1. Artificial Intelligence

Artificial intelligence has been around since the 1950s, but the technology at the time was unable to unlock AI’s full potential. Today, that’s a different story – thanks to Nvidia.

We are surrounded by artificial intelligence, yet the field is still largely misunderstood. People hear “AI” and immediately think of robots taking over the world.

The robotics field certainly uses AI, but the technology is also used in “less exciting” areas like data centers, gaming, natural language processing, and the cloud.

Nvidia is fabulously positioned for the age of AI because it creates the products that make these applications possible.

Nvidia GPUs are required for machine learning and deep learning algorithms. These GPUs can do computations that are too complex for CPUs.

Nvidia SoCs are used for mobile supercomputing, like mobile gaming and autonomous driving.

Nvidia’s “Professional Visualization” technology powers cameras and radars in autonomous vehicles. Automakers also use these technologies for engineering simulation and analysis.

Nvidia products are incredibly difficult and costly to make, so most companies are happy to buy them from Nvidia instead of making them independently.

#2. Cloud & Data Centers

Cloud computing would not exist without Nvidia’s GPUs – the company’s computing platforms and products give modern data centers the power to accelerate deep learning, machine learning, and high-performance computing (HPC) workloads.

Companies that shift to the cloud save money because they only pay for the computing power they need, compared to having on-premises servers that continuously run.

You turn the lights on when you enter a room and turn them off when you leave — that’s cloud computing. On-premise servers keep the lights on all day, even when nobody is in the room.

The growth of cloud computing has attracted the attention of the world’s best companies, like Amazon, Microsoft, and Google.

Amazon Web Services and Microsoft Azure are the new foundations of their respective companies.

AWS and Azure would be some of the most valuable businesses on Earth if they were standalone operations.

But none of this is possible without Nvidia — picks and shovels.

#3. Gaming

Gaming was Nvidia’s initial core offering and still generates the majority of its revenue by selling the world’s most advanced graphics cards, gaming solutions, and gaming technology.

However, investors are becoming increasingly excited about the company’s cloud gaming service “GeForce Now”, which runs on a subscription model of $9.99 per month.

Cloud gaming streams the latest games from powerful GPUs in remote data centers to nearly any device.

This means that Nvidia provides the processing power instead of the device in front of you – just like cloud computing.

Nvidia has an advantage over the other cloud gaming services like Microsoft’s Project xCloud, Google Stadia, and Amazon Luna: vertical integration.

The FAAMG stocks have to outsource their GPU production and high-performance computing to Nvidia, while Nvidia can keep all of that in-house.

#4. Crypto Mining

In addition to cloud computing, cloud gaming, robotics, and autonomous vehicles, Nvidia is involved in the crypto space. 

Its cryptocurrency mining processor (CMP) and GPU architecture allow professional miners to mine more efficiently and recoup rewards faster.

Miners use cryptography to validate transactions on the ethereum and bitcoin blockchains, which requires an extraordinary amount of computing power.

The miners that are first to validate transactions receive mining rewards, so the fastest and most accurate miners make the most money.

This incentivizes miners to have the best equipment that money can buy. Enter, Nvidia.

As the currencies themselves become more mainstream, expect the infrastructure around them to receive more attention and funding.

Admittedly, Nvidia has a complicated relationship with crypto and bitcoin mining.

The company’s gaming graphics now have software that prevents them from being used for mining. 

And CMP sales are down precipitously over the last few quarters. In our estimation, Nvidia is appealing to its core customer base of gamers and putting the mining business on the backburner. 

It’s a nice product suite to have ready in the event that bitcoin and crypto become impossible to ignore.  

#5. U.S. Infrastructure Bill & More Funding

The Biden administration released an initial draft for an infrastructure spending bill that would allocate $180 billion to support new research and development into technology like AI.

The plan would also send $100 billion to modern workforce education and training to teach workers how to use these new technologies that are enabled by companies like Nvidia.

Nvidia is at the epicenter of this government initiative; millions of developers use its products and services across countless different industries.

Nvidia plays a complicated role in the AI race between the U.S. and China. Nonetheless, more domestic funding in AI R&D will benefit Nvidia’s bottom line.

>> More: Best Semiconductor Stocks

Nvidia Stock Moat

A company’s “moat” typically refers to its ability to keep challengers at bay and defend its market share and profitability.

In our estimation, Nvidia’s moat is straightforward: the company makes things that are really difficult to make.

There are massive barriers to entry in the GPU manufacturing market due to costs and complexity. Few companies have the means or desire to take on such a task themselves.

Big Tech doesn’t defer GPU and SoC production for charity – it’s currently not worth their time and is easier to outsource.

This can change over time as companies progress, but most CEOs will be reluctant to make a risky and uncomfortable shift of this magnitude.

Nvidia Stock Analysis

Nvidia reported fiscal third-quarter earnings on November 17, 2021. Let’s jump into the report:

  • Earnings: $1.17 vs. $1.11 expected, up 60% year-over-year
  • Revenue: $7.10 billion vs. $6.82 billion expected, up 50% year-over year

Here are revenues by segment:

  • Gaming: $3.2 billion, up 42%
  • Data Center: $2.9 billion, up 55%
  • Professional Visualization: $577 million, up 144%
  • Automotive: $135 million, up 8%

Nvidia also announced new software products called “Omniverse Enterprise”, where digital representations can be created to simulate real-world processes. 

For example, a company might use Omniverse to optimize their factory in the digital space before rolling out the changes to the actual factory, saving time and money considering mistakes made in Omniverse have far less consequences compared to the real-world. 

Nvidia is well positioned to be one of the main suppliers for companies building the metaverse, such as Meta Platforms, Microsoft, and others. 

>> Related: Best Metaverse Stocks 

Nvidia Stock Competition

The GPU market is more volatile than the average sector due to geopolitical tensions between the U.S. and China, which adds an unpredictable layer to the already complicated environment.

Here are Nvidia stock’s top chip competitors:

  • Advanced Micro Devices (AMD)
  • Broadcom (AVGO)
  • Intel (INTC)
  • Qualcomm (QCOM)

Nvidia also competes with cloud gaming platforms:

  • Stadia (GOOG)
  • Project xCloud (MSFT)
  • Luna (AMZN)
  • PlayStation Now (SNE)

Nvidia’s competition is subject to change if more companies begin making their own chips and processing units.

>> Related: Best Semiconductor ETFs

Nvidia Stock Risks

#1. Companies Make Their Own Chips

While only a handful of companies would have the resources to do so, it’s possible that Big Tech starts making their own chips.

In fact, Apple recently ended its 15-year relationship with Intel and began making its own chips for laptops and desktops.

Apple CEO Tim Cook has said multiple times that the company has a long-term strategy of owning and controlling the primary technologies behind the products it makes.

What’s stopping Amazon from making its own chips for AWS? While manufacturing GPUs is very complex and costly, it wouldn’t be the first time the “retail” giant branched out into new markets.

#2. Geopolitical Complications

The United States disproportionately relies on China for chip manufacturing, specifically Taiwan Semiconductor Manufacturing Company, better known as TSMC.

Tensions between these two superpowers can impact the entire supply chain, making it more important than ever to pay attention to rising tensions.

For example, Nvidia GPU production could be affected if the U.S. and China Trade War heats up again.

While Nvidia won’t be the only company impacted by this, it would certainly feel the sanctions to a larger degree than the average company.

Nvidia Stock Allocation in Your Portfolio

The optimal amount of Nvidia stock will vary from person to person — factors such as available capital, time horizon, and investing goals should all be considered.

However, the following questions might help you find the right allocation:

  • Is Nvidia positioned to benefit from the rise of digitization?
  • Is Nvidia’s moat wide enough to fend off competition?
  • To what degree would increasing tensions between the U.S. and China affect Nvidia’s business?
  • Will the FAAMG stocks take over the cloud gaming market?
  • Can Nvidia be a market leader in mobile gaming?
  • Do you already have enough exposure to NVDA via QQQ or VOO?
  • Are there better pure-play AI investments elsewhere?
  • How can the market accurately price in AI applications that are yet to exist? And will Nvidia’s products and services be necessary for those applications?

We believe thought experiments of this kind are useful for determining portfolio allocations.

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The Motley Fool covers the latest on all-things Nvidia and will help you navigate the volatile markets of chips and AI.

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Nvidia Stock Analysis FAQs

Is Nvidia stock overvalued?

Nvidia stock is “overvalued” by most traditional metrics. Here are the price-to-sales ratios of Nvidia and Nvidia-like companies:

  • Nvidia: 29
  • AMD: 11
  • Qualcomm: 6
  • Intel: 3

Is Nvidia a good dividend stock?

Nvidia pays a quarterly dividend of $0.40 per share with an annual dividend yield of 0.057%. Nvidia’s dividend payout ratio is around 5% based on the trailing years of earnings. 

Should I buy Nvidia stock?

Nvidia stock will benefit from the next age of artificial intelligence applications, which is why many analysts consider it a “buy”. Most companies that develop AI depend on Nvidia for its GPUs. 

Will Nvidia stock go up?

It’s impossible to know in the short term, but we believe that Nvidia stock will go up in the long term due to its role in AI applications, data center, and gaming. Nvidia is a growth stock that will probably keep growing. 

Bottom Line: Nvidia Stock Analysis & Forecast

Nvidia is providing the tools to unlock AI’s true potential. While the stock has been on quite the run, it may just be getting started.

Nvidia’s key role in the future of AI makes it an attractive stock for long-term investors.

More Stock and ETF Analysis:

This article is for informational purposes only. It is not intended to be investment advice. 

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, cryptocurrency, and financial management. His work has been cited in leading industry publications, such as InvestorsPlace and Business Insider. Sean is interested in the people and companies who are driving financial innovation.