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Is NVIDIA Corporation a Buy?

Chris Neiger, The Motley Fool

Investors who follow the technology industry closely have likely heard a lot about the graphics processor maker NVIDIA Corporation (NASDAQ: NVDA) over the past few years. That may be because the company's shares are up more than 950% over the past three years, and because it's benefiting from the growth of emerging technologies including artificial intelligence (AI) and autonomous vehicles.

Seeing a stock make massive gains from opportunity in new tech trends is enough to make any investor sit up and take notice. But it takes far more for a company to be a great long-term investment than quick share price gains and a few bets on emerging trends. Fortunately, NVIDIA's stock is also rising due to the company's dominance in key industry segments and early wins in prospective markets.

Image of NVIDIA driverless car.

Image source: NVIDIA.

Why investors should consider NVIDIA's stock

First and foremost, potential NVIDIA investors should know that the company's primary business is in selling graphics processing units (GPUs) for the gaming market. In the most recent quarter, NVIDIA earned nearly 58% of its top line from this segment.

NVIDIA competes mainly against Advanced Micro Devices (AMD) in this space, but it maintains a leadership position in what's known as the discrete desktop GPU market (graphics processors that handle the image-processing load on desktop computers). At the beginning of this year, NVIDIA held about 66% market share in discrete desktop GPUs, with AMD taking up the rest.

NVIDIA's gaming business not only holds a dominant position, but sales of its gaming GPUs are also growing quickly. Revenue in this segment was up an impressive 52% year over year in the second quarter of fiscal 2019.

Of course, gaming GPUs aren't NVIDIA's only opportunity. The company is also using its graphics processors to win business in the AI, data center, and autonomous vehicle markets. In fact, major tech companies -- including Facebook, Amazon, and Google -- already use some of NVIDIA's graphics processors to power their AI systems. About 1,200 companies use the company's AI inference tech, and management believes that the organization's total addressable market for artificial intelligence will be $50 billion by 2023. NVIDIA is already tapping into the AI market through its fast-growing data center segment, which saw its revenue jump 83% in the second quarter of fiscal 2019, and accounts for about 24% of the company's top line.

Finally, NVIDIA has a growing opportunity to benefit from the autonomous vehicle market. NVIDIA manufactures a driverless car supercomputer, called Drive PX Pegasus, which will soon be available to automakers to help create Level 5 self-driving vehicles. The company has been working on driverless car tech for several years, but I should point out that for now, NVIDIA earns just 5% of its total revenue from its automotive business segment.

However, investors should remember that the autonomous vehicle market is still very young, and NVIDIA's early moves are likely to pay off in the coming years. An estimated 33 million autonomous vehicles will be sold globally in 2040 -- a huge jump from the estimated 51,000 expected to be sold in 2021. NVIDIA believes it can sell its Drive PX technology to automakers as this market expands, and management estimates that NVIDIA's total addressable market for autonomous vehicles will be $60 billion by 2035.

The verdict

Because of NVIDIA's strong position in the gaming GPU space and its growth in data center sales, I believe its stock looks like a buy. But investors need to remember a few things before they run out and buy shares. First, keep in mind that much of the excitement around the company comes from its potential in driverless cars. Sure, NVIDIA is developing great technology in this segment, but revenue growth is slow going. Investors will have to watch this space carefully to see how it evolves, and grasp that autonomous-vehicle tech sales will likely remain a small part of the company's sales for many more years.

Additionally, there's a lot of optimism around NVIDIA's stock simply because its share price has performed phenomenally over the past few years. The gains are impressive, to say the least, but it may be difficult to match that performance on an ongoing basis.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Amazon, Facebook, and Nvidia. The Motley Fool has a disclosure policy.