Nvidia (NVDA +1.67%) has made plenty of smart moves over the past year. The chipmaker struck back hard at AMD (AMD 0.03%) in the low-end GPU market with its new Pascal-based cards, forged new data center partnerships with IBM, and unveiled its next-gen autonomous driving supercomputer, Drive PX 2.
Image source: Nvidia.
The company has posted double digit year-over-year sales growth for three consecutive quarters, and is expected to post 22% sales growth for the full year. That growth caused Nvidia to rally nearly 200% over the past 12 months, but the stock remains fairly valued with a 5-year price/earning-growth (PEG) ratio of 1.4.
While the bullish reasons for owning Nvidia are now well-known, investors should also keep an eye out for three potential pitfalls which might cause the stock to fall.
1. AMD might launch Vega this year
Nvidia struck AMD pretty hard when it launched its GTX 1060 last month. The 6GB card, which cost $250, offered 50% more RAM and roughly 15% faster performance than AMD's RX 480 for just $50 more. Nvidia then launched a 3GB version of the 1060 for $200, which the company claims runs 10% faster than the 8GB version of AMD's RX 480, which costs $240.
AMD's RX 480. Image source: AMD.
But AMD isn't down for the count yet. In response to Nvidia's new Pascal cards, AMD might pull forward the launch of Vega, its next-gen GPU, from next year to this October. The Vega chipset will reportedly offer performance comparable with that of Nvidia's top-tier GTX 1080, which costs $600, at a lower price point. If the Vega cards arrive in time for the holidays, Nvidia's core gaming GPU business -- which generated over half its sales last quarter -- could take a big hit.
2. Intel could strike back in data centers
Nvidia's data center revenue rose 110% annually last quarter and accounted for 11% of its top line. The unit's sales were boosted by robust demand for its high-end Tesla GPUs in data centers. That's because Nvidia's Tesla GPUs can process certain machine learning and AI-related tasks faster than Intel's (INTC 0.07%) high-end Xeon Phi processors.
However, Intel's Xeon is still the industry standard for data centers, and they power 99% of all servers worldwide. Intel realizes that it could lose market share in machine-learning data centers to Nvidia, so it recently announced a third-generation Xeon Phi processor, code-named Knights Mill, which will arrive next year. Intel hasn't revealed any technical details about Knights Mill yet, but it will reportedly add more floating point calculations for machine learning algorithms.
If Knights Mill offers a significant performance advantage against Nvidia's Tesla GPUs, Intel can leverage its dominant market share to strike back at Nvidia in the machine learning market.
3. Plenty of competition in connected cars
Nvidia did a great job pivoting its Tegra mobile CPUs toward the connected car market. The Tegra-powered VCM (visual computing module) offered better graphics and audio for infotainment systems, and the Tegra X1-powered Drive PX platform provided ADAS (advanced driver assistance systems) with robust processing power.
The new Drive PX 2 platform, which will reportedly be ten times faster, is designed to power fully autonomous vehicles. Over 80 automakers, suppliers, and university research centers worldwide are already developing driverless cars based on the PX 2. Demand for these platforms boosted Nvidia's automotive revenue, which accounted for 8% of its top line, by 68% annually last quarter.
Image source: Nvidia.
But Nvidia also faces fierce competition in this fledgling market. NXP (NXPI +1.02%), which became the biggest automotive chipmaker in the world after buying Freescale last year, recently unveiled BlueBox -- a turnkey driverless platform that competes directly against Nvidia's Drive PX 2. Since NXP also supplies a wide variety of other automotive chips, it could eventually use aggressive bundling strategies to marginalize Nvidia.
Other competitors include Qualcomm, which launched its Snapdragon 820 Automotive processors for infotainment centers earlier this year; Intel, which supplies Atom chips to several automakers for the same purpose; and Mobileye, which provides ADAS and computer vision chips to 90% of the top automakers in the world. These rivals could spark a fierce pricing war and reduce the margins of Nvidia's automotive business.
So is Nvidia still a worthy investment?
I personally believe that Nvidia is still a solid long-term investment, and that the company has a knack for establishing first-mover's advantages in growing markets. However, investors should still do their homework and carefully weigh the pros and cons before buying this stock after its massive year-long rally.
