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Nvidia (NVDA) Upgrade: Could Be Time To Buy

Daniel Laboe

My favorite semiconductor stock, Nvidia NVDA, was just upgraded by the Royal Bank of Canada (RBC) RY, rallying the stock 1.3% in today’s trade. RBC moved its price target from $190 to $217, which would represent a more than 17% upside from NVDA’s current share price of $185.

NVDA has had a volatile run since the beginning of the year but has returned shareholders over 35%. RBC analyst, Mitch Steves, is convinced that NVDA is going to be the best performing large-cap stock over the next 6 to 9 months. I am inclined to agree with him as their data center, and gaming outlooks appear increasingly positive.

NVIDIA Corporation Price, Consensus and EPS Surprise

NVIDIA Corporation Price, Consensus and EPS Surprise
NVIDIA Corporation Price, Consensus and EPS Surprise

NVIDIA Corporation price-consensus-eps-surprise-chart | NVIDIA Corporation Quote

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RBC expects that Nvidia’s data center business will see triple-digit growth in the short-term, followed by high double-digit growth in perpetuity as hyperscale computing ramps up.

Evercore ISI also raised its NVDA target today from $185 to $225 (over 20% upside from current price). The main catalysts behind this increased price target is strong expected gaming GPU demand in H2, flowing into 2020. New titles, virtual reality, and cloud-gaming are driving factors that are going to propel Nvidia’s gaming segment back into high double-digit growth.

The Business

Graphics processing units (GPU) are beginning to have functionality far beyond just rendering images. The GPU space is slowly becoming an indispensable semiconductor segment, and with around 70% of the discrete desktop GPU market under its control (AMD AMD controls the other 30%), Nvidia is positioned to reap significant returns.

Nvidia’s claim to fame is its graphics processing unit (GPU), which was invented to take PC gaming to the next level. Now 2 decades later, the same technology is being used for hyper-fast data analytics and developing artificial intelligence. GPUs are becoming a necessity for data centers to compete in a market where nanoseconds make a difference.

Cloud Gaming

Nvidia’s gaming segment is the firm’s bread & butter and still makes up more than 50% of the company’s topline. Nvidia has been able to perpetually stay ahead of its biggest GPU competitor, AMD, with its unparalleled product quality. Now the company is taking its GPU to the cloud.

Like cloud computing is the future of business data and analytics, cloud gaming is the future of gaming. Nvidia is making a big bet in this field with its cloud platform GeForce NOW. This platform allows gamers to use their Macs or PCs for gaming anywhere with the high-speed, low-latency technology of Nvidia’s GPUs without needing Nvidia’s hardware locally.

Nvidia is teaming up with telecommunication providers “to expand and improve the cloud gaming experience globally.” Getting in front of the 5G wave to be prepared with a ‘turnkey solution’ once 5G is widely available.

GeForce Now is currently in the beta stage, but gaming forums are already calling this the best cloud-based gaming platform. The anticipated price of this subscription-based service is $10 monthly.

Subscription-based revenue is king in the tech-space today with a consistent stream of sales that grow quarter-over-quarter. This new topline driver may be just what Nvidia needs to take its share price to new highs.

Google GOOGL and Microsoft MSFT are working on their own cloud gaming services though I believe that Nvidia and its PC gaming community are niche enough not to lose much market share in their space.

Data Centers

Nvidia controls over 97% of the data center GPU market (according to Market Watch) and is well-positioned to be the sole GPU to develop AI. The barriers to entry in this business are far too high for any newcomer to put a dent in Nvidia’s market share, so it is positioned well to grow with the data center GPU space.

There was an enormous push to expand data center infrastructure the past 3 years to give firms the flexibility to hyperscale their computing services as customer needs proliferate — hyperscale computing combined with the crypto-mining bubble induced manic demand for Nvidia’s powerful, light-speed GPUs.

Over the past 3 years, Nvidia’s data center revenue has grown 333% but has slowed down this year with the crypto-craze abating and data centers still digesting the massive amount of tech they bought the prior year. We are going to see another boost in hyperscaling infrastructure with deep learning and AI development.

Mellanox Acquisition

Nvidia is doubling down on data centers through their proposed deal with Mellanox MLNX, a high-performance computing products and solutions company. Intel INTC, Microsoft MSFT, and others showed interest in this acquisition, but Nvidia ultimately won the deal with a bid of $125 per share, representing a 17% premium from the share price before the announcement.

Now there are fears that China will block the deal amid the trade war. This acquisition is a further plunge for Nvidia into AI and data centers. According to Nvidia’s press release earlier this year, “with Mellanox, NVIDIA will optimize datacenter-scale workloads across the entire computing, networking and storage stack to achieve higher performance, greater utilization and lower operating cost for customers.”

Take Away

NVDA has been on my buy list for some time, and I have not seen a price that I disliked for this stock all year. This company is going to be on the front lines of the 4th industrial revolution. Nvidia will be driving the development of AI into uncharted territories and advancing gaming & VR to unprecedented levels.

Nvidia’s niche market positioning and innovative core make them a great bet for your portfolio of the future. I like NVDA at any price below $200.

 

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