Shares of graphics-chip kingpin Nvidia (NVDA) enjoyed another unbelievable year in 2021. The company has a front-row seat to many of the hottest technological trends out there. From the continued rise of AI to the future of the metaverse, it's clear that demand for Nvidia's leading graphics-processing products has the means to remain incredibly robust for many years down the road.
Given some of the more abstract trends like the metaverse, longer-term demand for processing power is difficult to fathom. Arguably, the metaverse (virtual worlds) already exist, with experiences and games offered by the Oculus segment of Meta Platforms (FB).
That said, the current state of the metaverse isn't what has so many investors excited. Indeed, the types of virtual worlds made famous by the 2018 film Ready Player One are what investors are looking towards. As ever-improving virtual and augmented worlds become increasingly popular through the decade, Nvidia and other GPU makers are due to have a profound tailwind to their back.
Despite the many promising trends and tailwinds, the potential for rising competition and NVDA stock's hefty valuation multiple has me standing on the sidelines in 2022. I am bearish on the stock. (See Analysts’ Top Stocks on TipRanks)
Nvidia Stands atop the GPU Space, but Can It Add to Its Lead?Right now, Nvidia is a leader that's poised to take the lion's share of the rewards that'll accompany its massive TAM (Total Addressable Market). The stock is priced such that Nvidia will remain dominant.
Over time, though, there's bound to be a rise in competition, and investors should not discount their potential impact on Nvidia as firms push to pack powerful graphics processing capabilities into a smaller package.
Indeed, energy efficiency and compact design are poised to become increasingly important in an era where GPUs could find themselves embedded in compact wearables.
Sure, graphical power needs to get stronger to power the future metaverse, but energy efficiency needs to be kept in check if the future's mixed-reality devices are to shrink to a size that's small enough to fit in a mere pair of glasses.
Nvidia's Biggest Threat Is a Company We All Know and LoveMany analysts expect Apple (AAPL) to pull the curtain on their mixed-reality headset within the next year and a half. Such anticipation is a major reason why AAPL stock has been surging higher, even in the face of modest weakness in the tech sector.
Looking beyond the much-anticipated headset, Apple could also have a pair of lighter-weight AR glasses ready by 2025, according to Ming-Chi Kuo, the same analyst that shed light on Apple's coming mixed-reality headset.
Undoubtedly, Apple has been working on its own line of SoCs (Systems on a Chip) with its M1 line. Thus far, they've been imposing, not only on the performance front but in terms of energy efficiency. Apple's M1 (Pro and Max) chips are incredible on the latter metric. Apple's own chips are likely to be incorporated into its next-generation mixed-reality devices.
As Apple continues delivering such top-level benchmarks from its M-series chip iterations, one has to think that Apple could stand to eat up a big chunk of the graphics-processing market over the next three years. As Apple's chip capabilities continue raising the bar, it seems incredibly unlikely that the next generation of Apple VR/AR devices will include anything other than an ambitious chip designed by Apple.
The implications for Nvidia are unclear should Apple find itself with the keys to the metaverse. Regardless, Apple, the original innovator, could find itself moving further into Nvidia's turf, as it takes hardware design and creation into its own hands.
If I were an Nvidia shareholder, it's Apple, not AMD (AMD), that could pose as the biggest rival over the long run.
Wall Street's TakeTurning to Wall Street, NVDA stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 24 Buys and two Hold recommendations.
The average Nvidia price target is $360.17, implying 24% upside potential. Analyst price targets range from a low of $285.00 per share to a high of $400.00 per share.
The Bottom Line on NvidiaApple's hardware ambitions are worth keeping an eye on, as it looks to move into many of the emerging areas of the tech sector that Nvidia has its sights set on.
Even if Apple powers many of the next-generation experiences in the metaverse, there's still a ton of market share for Nvidia to support its lofty multiple. The applications of top-notch graphical processing are wide enough to have more than one winner. At this juncture, Nvidia's Omniverse platform, in particular, looks like a potential game-changer.
Although Nvidia is a wonderful company that seems destined to reach a $1 trillion valuation, I just don't see last year's momentum carrying over in 2022. There's just too much excitement in the name here, but I would be open to buying the name on a steeper pullback.
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Disclosure: Joey Frenette owned shares of Apple at the time of publication.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
Nvidia (NVDA) continues to trade near record levels following the stock's extended rally over the past few years. Despite the ongoing concerns, including COVID-19, its steep valuation levels remain. The company keeps benefiting significantly from the growing adoption of cryptos, with demand for its graphics cards staying at sky-high levels due to their contemporary utilization of mining coins.
At the same time, the industry's lasting supply chain issues and shortages have additionally broadened the disproportionally higher demand to supply gap, feeding Nvidia with tremendous pricing power. Try building a PC these days, and upon deciding which graphics card to buy, you will quickly realize how absurd their prices have become.
While Nvidia has been pushing to boost its total production capabilities to meet the underlying, growing demand, its huge pricing leverage alone has led to swift growth in its financials and richer margins by the quarter.
In my view, Nvidia's card will play a critical role in digitalization and AR/VR applications in the coming years. For context, the number of global virtual reality device shipments is expected to grow at a CAGR of 33.85% through 2026. That said, I can't but remain neutral to the stock solely due to its rather steep valuation, which reduces investors' margin of safety at its current levels. (See Analysts’ Top Stocks on TipRanks)
Nvidia's Latest ResultsThe company's latest results were once again quite strong, with revenues growing 50% year-over-year to $7.1 billion, or 9% from the previous quarter. Powered by evolving economies of scale and its fantastic pricing power as of late, Nvidia's margins have also repeatedly been expanding.
Gross margins climbed to 67%, a 30 basis points increase sequentially, or an impressive 150 basis points increase compared to last year. Consequently, operating income and net income also skyrocketed. Nvidia's net income increased 13% quarter-over-quarter and 62% compared to Q3 2020. EPS came in at $1.17, 60% higher year-over-year as well.
Is NVDA Stock Too Expensive?Nobody can argue that Nvidia's growth is nothing but outstanding. Nvidia is well-positioned to profit extensively from several trends, some of which have only just started to gain traction, such as VR/AR.
Meta Platfroms' (FB) all-in bet on the development of the Metaverse is a testament to the potential size of this new market. In addition, Nvidia's recent acquisition of Omniverse Avatar should be a great asset in this growing market moving forward. There is even a virtual interview through Omniverse with Nvidia's CEO, which showcases the technology platform's capabilities in generating interactive AI avatars.
Additionally, the crypto-economy should continue to gain heightened adoption, which will likely sustain the ongoing shortage in graphics cards, allowing Nvidia to retain its very beneficial pricing power over the next few years.
However, we can't just ignore that the stock is currently trading at a trailing P/E ratio of around 93x and a forward P/E ratio near 60x. Hence, Nvidia's total return prospects could be relatively thin for current investors.
Furthermore, capital returns remain insignificant to counterbalance a probable valuation compression. The stock's dividend remains inconsequential and mostly plays the role of a "token," while buybacks would hardly benefit shareholders at the stock's current valuation levels, in my opinion.
Wall Street’s TakeTurning to Wall Street, Nvidia has a Strong Buy consensus rating, based on 24 Buys and two Holds assigned in the past three months. At $360.17, the average Nvidia price target implies 19% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >