SThe supply chain disruptions triggered by the pandemic have created problems in many industries. For example, automakers and consumer electronics companies are currently grappling with chip shortages, and those headwinds could last until next year. Of course, this particular problem has actually been a tailwind for chipmakers like Nvidia (NASDAQ: NVDA).
In fact, Nvidia’s stock price has climbed 150% since the start of 2021 and 455% since the start of 2020. The company has a market capitalization of $ 814 billion at the time of this writing. which makes it by far the largest semiconductor company in the world. But after these huge gains, are Nvidia shares still a smart buy?
Let’s dive into it.
Image source: Getty Images.
The leader in high performance computing
Nvidia specializes in accelerated computing. In 1999, the company invented the graphics processing unit (GPU), a chip designed to parallelize high-performance computing tasks. In other words, GPUs can perform thousands of calculations at the same time. For this reason, they are ideal for generating ultra-realistic video game graphics, and they are shaping the future of evolving technologies such as augmented reality, virtual reality, and the metaverse.
However, GPUs also excel at handling complex data center workloads, such as analytics, artificial intelligence, and scientific computing. And last year, Nvidia strengthened its hardware portfolio with the acquisition of Mellanox, a specialist in high performance networking solutions. The move made Nvidia even more relevant in the data center, expanding the reach of its products. But Nvidia does more than hardware – it’s a full-stack IT company.
To this end, Nvidia also provides a range of software optimized for GPUs, such as TensorFlow for AI training, TensorRT for AI inference, and Rapids for data science workloads. It also offers a range of application frameworks that accelerate development, such as Merlin for recommender systems, Isaac for robotics, and Drive for autonomous vehicles. In short, Nvidia is an end-to-end solution for accelerated computing.
More importantly, it has established itself as the industry leader. Its computing platform powers eight of the top 10 supercomputers, and Nvidia has over 90% of the supercomputer accelerator market share. These numbers are a testament to its dominance in the data center, a market that management believes will reach $ 100 billion by 2024.
Likewise, Nvidia chips remain the gold standard for gaming and graphics, as they have an 83% market share in discrete PC GPUs and over 90% market share in workstation graphics.
Not surprisingly, Nvidia’s financial performance has been impressive.
Data by YCharts.
A robust growth strategy
In addition to deploying Nvidia hardware in private data centers, customers can run workloads on Nvidia GPUs in all major public clouds, from Amazon Web services at Tencent. And Nvidia recently added support for hybrid environments with the launch of AI Enterprise, a software suite that allows businesses to virtualize AI and analytics workloads across private and public clouds. Virtualization software (in this case, VMware vSphere) creates a pool of resources from the underlying infrastructure, allowing customers to use physical hardware more efficiently.
To complement its AI Enterprise suite, Nvidia offers two additional subscription products: Base Command and Fleet Command, which streamline the development and deployment of AI applications. Collectively, all three products are available through Nvidia LaunchPad, a program that gives businesses immediate access to AI infrastructure.
However, the most exciting subscription product is Omniverse. It took almost five years for Nvidia to develop this revolutionary platform, and it’s finally live. Omniverse accelerates 3D workflows by enabling real-time collaboration between creators such as architects, engineers and game developers across a range of 3D design software. It also serves as a simulation engine capable of generating physically accurate synthetic data, which means Omniverse can be used to train AI models that power autonomous robots and self-driving cars.
It’s amazing, but these use cases only scratch the surface. For example, Nvidia recently announced Omniverse Avatar, a platform capable of generating AI avatars, digital automata capable of seeing, speaking, thinking and understanding. This technology could revolutionize customer service and equip everyone with a smart digital assistant. In short, Omniverse is a stepping stone to the metaverse, and Nvidia has already established itself as a key player.
More generally, the company’s foray into subscription software is expected to result in a stable revenue stream in the years to come.
Image source: Getty Images.
Some concerns about the evaluation
Currently, Nvidia shares are trading at 34 times sales, an incredible premium over chipmakers like Advanced micro-systems and Intelligence, which are trading at around 13 and three times sales respectively. Perhaps more worryingly, Nvidia’s current price and sales multiple is twice as high as its three-year average (and the highest in decades). Simply put, this stock looks very expensive.
On the flip side, Nvidia’s dominance in accelerated computing has made it a key player in several emerging industries, from artificial intelligence and augmented reality to robotics and metaverse. And the visionary leadership of founder and CEO Jensen Huang should keep the company on a good course.
Looking ahead, I certainly think Nvidia can grow its business over the long term, but I’m less certain that the stock can beat the market in the short term. For this reason, if you have a lot of spare time – and you are prepared to deal with volatility – I think there is nothing wrong with buying a few stocks today. But start small and build a position slowly using the average dollar cost.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Trevor Jennewine owns shares in Amazon and Nvidia. The Motley Fool owns shares and recommends Advanced Micro Devices, Amazon, Nvidia, and Tencent Holdings. The Motley Fool recommends Intel and VMware and recommends the following options: January 2022 long calls at $ 1,920 on Amazon, January 2023 long calls at $ 57.50 on Intel, January 2022 short calls at $ 1,940 on Amazon, and January short calls 2023 at $ 57.50 on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.