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I wish I could write just a one sentence article on Nvidia (NASDAQ:NVDA)? If I could, it would be this: “Buy NVDA stock on the dip, because this is a best-in-breed holding.”
NVDA) logo on the indoor wall of a corporate building made of yellow tiles" width="300" height="169">Source: JHVEPhoto / Shutterstock.com
But it’s not just a best-in-breed stock for growth investors or tech investors. NVDA stock is a best-in-breed stock for the entire market.
Nvidia’s products are top of the line, while demand for its products is through the roof. The company continues to make fantastic M&A choices to bolster its financials and its market reach. It has accelerating growth amid the novel coronavirus and it continues to situate itself in secular growth trends.
I’m sorry if I sound to0 bullish, but it’s hard not to be even though the stock has been on a big run. But as a result, it’s precisely the kind of name I’d be looking to buy on the dip. It’s also similar to the kinds of companies I recommend with Investment Opportunities. Only the names there are more obscure and have even more room to run thanks to their groundbreaking innovations.
With all of that said, let’s dive into the nitty gritty of NVDA stock.
Breaking Down Nvidia
I’ve made this point ad nauseam over the past few months, but it bears repeating. Once Covid-19 came along, most stocks lost their growth prospects. While we’ve seen a monstrous recovery in the economy, it’s not back to where it was before the coronavirus came along.
As a result, many companies will post negative growth this year. Meaning that there are now fewer growth stocks to choose from for investors. Those that had growth were worth a premium and those that still have growth are still worth a premium. Perhaps an even larger premium, since there are fewer to choose from.
However, the small handful of stocks with accelerating growth from the start of the year are worth an even bigger premium than before. It doesn’t matter if it’s a recession or not, investors will always crave growth. That’s why many are flocking to core investment themes like the 5G revolution (of which Nvidia plays a key role). But not all 5G stocks are created equal, as you’ll discover with my 5G Highway Super Portfolio, which picks the best of the best.
Analysts expect 44.5% revenue growth this year to $15.77 billion for Nvidia. Earnings are forecast to grow an even more impressive 57% to $9.09 per share. Some investors may scoff at NVDA stock at 54 times earnings — not me. Because this growth has plenty of runway and we pay up for that growth.
Next year, estimates call for 18.5% revenue growth and 21.6% earnings growth. But just consider that Nvidia is looking to go from $10.9 billion in sales in fiscal 2020 to estimates for $18.7 billion in 2022. That may even be conservative, though. I wouldn’t be surprised to see Nvidia top $20 billion next year.
Current year estimates call for revenue of $15.77 billion. At the start of 2020, those estimates stood at about $10.8 billion. Estimates for next year started at $12.8 billion, before quickly climbing to $15.4 billion in February and now they ultimately sit north of $18 billion.
It’s still possible that analysts are being conservative.
NVDA Stock and Its M&A
Nvidia does one thing really well and that’s M&A. Its $6.9 billion acquisition of Mellanox showed us that. That company was involved in a similar (yet different) side of the datacenter business. For Nvidia to acquire the company at a reasonable price, it not only created synergies with its own datacenter business, but it kept the technology out of its competitors’ hands.
Upon acquiring the property, management told us it would be immediately accretive to earnings, gross margins and cash flow. That’s exactly what investors want to hear.
With the surging demand for its products, Nvidia has a ton of cash flow. It only makes sense to dump that cash into other assets that will amplify the company’s returns.
While the terms weren’t announced, Nvidia also announced in May that it plans to acquire Cumulus. Cumulus is a software company that is partnered with Nvidia, again helping to show the synergy potential between the two.
Both are small potatoes compared to the latest announcement, though. Nvidia now hopes to gain approval on its $40 billion acquisition of Arm. The deal will consist of $21.5 billion in stock and $12 billion in cash, before including other payouts.
Nvidia expects Arm to be immediately accretive to earnings and margins — again, I love this — and drive long-term growth. Nvidia wrote: “The combination brings together NVIDIA’s leading AI computing platform with Arm’s vast ecosystem to create the premier computing company for the age of artificial intelligence, accelerating innovation while expanding into large, high-growth markets.”
The Bottom Line
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Source: Chart courtesy of StockCharts.com
At the end of the day, that last sentence above really defines NVDA stock as a whole. The company is becoming the backbone to tomorrow’s technologies.
Whether that’s in the datacenter as we see an explosion in data or whether that’s in self-driving vehicles, which is the way of future transportation. Or in A.I. and machine learning, which will be a major driver in nearly every facet of technology as the years go on.
That doesn’t mean we’re forgetting Nvidia’s other units, like its performance and graphics-driven products that are used in gaming, software and other applications.
Put simply, Nvidia is a pillar in the technology space. While the stock seems like it has been on a big run, when one looks at Nvidia based on five or ten years from now, it still seems cheap. I am buyer on the dip, even if the overall market throws a tantrum later this year.
But if you’re looking for the most profitable stocks to buy on 5G prospects, Nvidia is just the tip of the iceberg. Investors can discover new companies developing revolutionary technologies to make the most of our hyper-connected future.
As the chief technology analyst at InvestorPlace, I’ve curated The 5G Highway Super Portfolio … a tactical approach to investing in 5G that maximizes short-term and long-term gains. In this special report, I uncover the 5G equivalents of the hottest tech behemoths and more.
With a proven track record in making calls on tech titans far before they dominated the field, my research team and I have demonstrated the know-how needed to sift through the 5G duds to find the real gems. I’ve found companies at the forefront of key 5G revolutions: movements in driver-less cars, virtual reality and remote surgery … just to name a few.
On the date of publication, Matt McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article had a long position in NVDA.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.