Why Nvidia Shares Will Top $500

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Nvidia (NASDAQ:NVDA) stock is on a high once again, doubling in value after falling to $196.40 a pop in mid-March. Panic induced selling hit the tech sector hard after the novel coronavirus struck, but several stocks have bounced back. NVDA stock is no different.

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Its recent quarterly results reinforce the fact that the chipmaker is a tour de force in its industry. Date centers and AI services remain the lynchpins of future growth, and the company also has other segments like its automotive business that can become significant contributors in the future.

Looking ahead, Nvidia forecasts second-quarter revenue of $3.58 billion to $3.72 billion. Analysts are expecting $3.25 billion.

Data Center Growth Pushes NVDA Stock Higher

In the 2021 first quarter, Nvidia’s data center business unit recorded year-on-year revenue growth of 80%, with sales topping $1 billion for the first time. Along with the company’s gaming business, data centers contributed the most to overall revenue, which was up 39% from the year-ago period.

The growth in data centers far outpaced the 27% year-over-year growth in the gaming business unit. That goes to show the evolution of the business from a graphics-chip maker for code games and consoles, to a more diversified tech giant.

It must be a bittersweet moment for management when they see these results. Gaming is what brought Nvidia to the dance. But data centers will have a larger part to play in its future. With more people sheltered in their homes during the Covid-19 pandemic, the segment will only grow.

That’s why the company paid $6.9 billion to acquire Mellanox, a high-performance computing chip maker. The acquisition, although draining on cash reserves, will serve as a catalyst for the data center business.

CEO Has Skin in the Game

Jensen Huang is the founder and chief executive officer of Nvidia. The executive still has a 3.8% stake in the company. That may not seem like a lot. But Huang is a visionary businessman who oversaw the company’s rise from a nascent startup to a Silicon Valley giant. The fact he remains invested in the company should come as a sigh of relief.

Warren Buffett is a legend in the investing world. When quizzed about how he picks stocks, there is one thing he often states: management is key to growth and profitability.

Buffet eschews the mantra of picking cheap shares in the market in the hopes of striking gold. Instead, he goes for companies with strong, efficient management that successfully drive results for several years.

Hence, NVDA stock would be right up his alley.

Potential in the Automotive Segment

Nvidia’s automotive segment was not as successful as its other counterparts, falling 7% year-over-year due to Covid-19.

However, the segment does offer some excellent long-term potential. The firm’s focus is on semi-autonomous and fully autonomous vehicles that will use AI-enabled products.

NVIDIA DRIVE AGX is a full end-to-end solution for fully autonomous vehicles, providing hardware, software, and sample applications. Granted, it will not be a significant moneymaker in the forthcoming quarters, but it’s a segment that could become a significant tailwind in the future.

Is NVDA Stock Appropriately Valued?

One thing is for sure, NVDA stock is not cheap by any means. Trading at 77.94x trailing price to earnings, shares of the semiconductor firm are highly-priced. That’s why you didn’t see a massive surge in share price even though the quarterly results were excellent.

In its peer group, Advanced Micro Devices (NASDAQ:AMD) and NXP Semiconductors (NASDAQ:NXPI) are the only two companies that have a P/E ratio higher than NVDA.

You know the market is bullish when Intel and Nvidia both have valuations of more than $200 billion. Analysts’ estimates are for Nvidia to touch revenues of $14.64 billion this fiscal year, while Intel will reach $75.12 billion.

However, considering the high rate of revenue growth the company is experiencing, I believe the premium valuation is justified. I prefer pouring capital into a company that is led well and has a strong vision for growth because that will ultimately draw returns and profitability.

Nvidia’s data center segment and AI solutions will drive growth rates higher. Gaming will remain a substantial contributor to overall revenues, and share prices will continue to skyrocket. Simply put, you can’t go wrong investing in NVDA stock.

Faizan Farooque is a contributing author for and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan Farooque does not directly own the securities mentioned above.

The post Why Nvidia Shares Will Top $500 appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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