Nvidia Stock Buy Right

Image source: Getty Images.

NVIDIA Corporation's (NASDAQ:NVDA) stock has had a tremendous run this year. Its price is up 238% over the past 12 months as investors have placed their confidence in the company. But what is NVIDIA doing right that has pushed the company's stock price so high?

It has to do with how the company has managed to grow its key businesses while expanding into new markets, all while keeping competitors at bay. 

1. Steady revenue growth in key business segments

NVIDIA reports its revenue in two main segments: GPU and Tegra processors. And over the nine months ending in October the company substantially increased revenue in both. 

The company's GPU business consists of its GeForce lineup for gaming, quadro processors for designers, Tesla chips for research and things like artificial intelligence, and cloud-based visual computing. Since the beginning of the year, this segment has grown by 32%.

Much of that has come from the company's strong position in the gaming market (more on that later) and the company's ability to find new uses for its GPU technologies to market to customers.  

NVIDIA's Tegra business consists of versions of its processors that are embedded onto a single chip for online gaming, entertainment devices, drones, cars, and other applications. And in the first nine months of the fiscal  year, the company grew Tegra revenue by 41% year over year. 

2. Expansion into new markets

If you've been following NVIDIA for the past couple of years, then you'll know the company is making huge strides into the semi-autonomous and autonomous car markets.

The company's current iteration of its Drive PX supercomputer for semi-autonomous cars is already used by 80 automakers and automotive suppliers. The company is a leader in providing processors that give cars situational awareness and will likely benefit from the estimated 76 million semi-autonomous and autonomous vehicles that will be on the roads by 2035.

NVIDIA only earned 6% of its revenue from its automotive business in the fiscal third quarter of this year, but as the driverless car market expands -- to an estimated $77 billion by 2035 -- the company is positioning itself well to benefit later. 

3. Dominating current markets

NVIDIA brought in 62% of its total revenue in the fiscal third quarter from its gaming segment, and the $1.2 billion it made was a 63% increase year over year.

NVIDIA is not only growing gaming revenue, it's also dominating the discrete desktop GPU space with about 70% market share right now, followed by rival AMD's 30%. AMD has made some gains over the past few quarters, but NVIDIA is still comfortably in the lead, and there's no sign that's changing any time soon. NVIDIA's graphics cards are still some of the most sought-after by gamers, and the company's new focus on virtual reality means it's preparing for the next generation of gaming

A few final thoughts

NVIDIA currently trades at about 73 times its trailing-12-month earnings. That's relatively expensive compared to the P/E average of 26 for the entire tech sector. NVIDIA's stock premium has been fueled by the company's growth and investor confidence that management will be able to keep the momentum going. 

NVIDIA could deliver for them if its early investments in driverless car technology pay off, if the company holds onto its dominance in desktop graphics cards, and if NVIDIA is successful in new areas like the growing virtual reality market. But if the company stumbles in a couple of these areas, then investors jumping in now might not see the same gains the company has experienced over the past year. That's not to say NVIDIA isn't a good long-term investment, but investors should know that NVIDIA will need to continue growing fast in order to justify its current price. 

Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.