There is no stopping the stock of NVIDIA Corp. (NASDAQ:NVDA), the graphics chip designer that dominates gaming and, increasingly, Artificial Intelligence (AI).
The shares are up 76% in 2017, with analysts pounding the table for it and one even nick-naming a dog for it. The latest price target of $250 per share would take the market cap to $150 billion, within sight of mighty Intel Corp. (NASDAQ:INTC), whose value has stalled out at $178 billion.
But this is not a bubble stock. Nvidia sales are growing 50%, year-over-year, each quarter, and it brings 25% of those revenues to the net income line. The company’s debt is just 25% of assets, and has been declining through 2017. Operating cash flow came in at nearly $1 billion for the most recent quarter.
The price to earnings ratio of nearly 54 looks high, but if earnings keep growing you may be paying less than 30 times 2018 earnings if you buy now.
All About the Cloud
If NVIDIA were still suck in its original niche of gaming chips, this would not be happening. But graphics processing can easily be adapted to deep learning, sucking up huge amounts of data and offering quick analysis. That’s the heart of artificial intelligence, which is now being built into clouds.
Systems like Amazon.Com Inc.’s (NASDAQ:AMZN) Alexa, Microsoft Corp. (NASDAQ:MSFT) Cortana, International Business Machine Corp. (NYSE:IBM) Watson, Apple Inc. (NASDAQ:AAPL) Siri and Google Assistant from Alphabet Inc. (NASDAQ:GOOGL) aren’t just voice interfaces. They are front ends to artificial intelligence. They require the support of more processing power than the cheap, low-end silicon clouds were originally built with can deliver.
Now that these clouds are built, the race is on to upgrade them, to add capability that offers instant answers to complex questions. It’s not just the data center market that’s booming, but AI based on graphics chips turns out to be at the heart of self-driving cars, the next hot market.
All this has put NVIDIA in a very sweet spot.
Low Costs, High Profit at Nvidia
NVIDIA is also a “fab-less” chip company. That is, it designs chips and has someone else make them. In this way, it is more a software company than a hardware company.
The costs of building chip factories, which rise exponentially as chips get complex through what I have deemed “Moore’s Second Law,” continue to drag down the company Gordon Moore co-founded. Intel’s growth has slowed to a crawl and its debt is continually rising as it absorbs the cost of new gear. Its attention is focused on keeping the factories busy, not on designing for the market.
NVIDIA, on the other hand, is entirely focused on the posse that’s after it, chip makers like Advanced Micro Devices Inc. (NASDAQ:AMD) advertising cheaper graphics, or Intel itself, promising faster graphics next year or the year after.
The lack of a fab means NVIDIA can focus entirely on performance and keep moving forward. It’s why our Will Ashworth has the stock on his “dream team.” It’s why our Bret Kenwell says it’s still in buy territory, despite its high price. It’s why our Tyler Craig sees it breaking out and our James Brumley sees it winning the AI race.
Only technicians are worried. Josh Enomoto would like the stock to take a “chill pill” because its rise has been so sudden and so steep.
The fundamental call, if you believe in the economy, is simply to buy it. NVIDIA is driving the first cloud “replacement cycle,” the first major upgrade of cloud processing. Games and Bitcoin mining are secondary. It’s the cloud where the action is. Those are the buyers that count.
So long as they’re buying NVIDIA with both hands, you should too.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
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