Shoulda, woulda, coulda.
All three apply to me and NVIDIA (NVDA 2.54%) stock. I should have bought shares of the graphics-chip maker a long time ago. I knew it was a top stock recommended by The Motley Fool -- and it pays to listen to the Fool's newsletter recommendations. I would have bought NVIDIA stock, but I wanted to buy it on a pullback. And I certainly could have bought it at any time, but just didn't. Until a few days ago.
At long last, I finally bought NVIDIA stock. Yes, after it has already generated gains of over 100% during the last 12 months, over 960% in the past three years, and more than 1,500% in the past five years, I pulled the trigger. And I did it for three key reasons.
1. Massive growth potential of AI
At the top of my list for buying NVIDIA was the massive growth potential for artificial intelligence (AI). While there are certainly other stocks that will benefit from the rise of AI, I think that NVIDIA remains the king of all AI stocks. The list of companies that use NVIDIA graphics processing units (GPUs) for AI reads like a "who's who" of technology. Actually, they read like a "who's who" of AI.
Google parent Alphabet (GOOG 0.87%) (GOOGL 0.92%) employs NVIDIA's Tesla accelerator GPUs (no relation to the electric-auto maker, by the way) for data-center AI processing in Google Cloud. Google touts NVIDIA's high performance and reliability for machine learning and other applications.
Another AI pioneer, IBM (IBM 1.68%), also uses NVIDIA GPUs that are optimized for deep learning in its IBM Cloud. IBM also recently teamed up with NVIDIA to launch high-performance chips designed to support AI and machine learning applications, including image recognition and credit card fraud prevention.
Although other chipmakers are trying to catch up, NVIDIA's momentum is only gaining steam. The company's 2017 financial performance proves the point. I'm not worried about rivals gaining ground, though, because the AI market is big enough to support many players. In 2017, the AI market was estimated to be around $2.4 billion, according to Statista. By 2025, the market is projected to top $59.7 billion. And I think NVIDIA will be a key ingredient to that growth.
2. Virtual reality will take off sooner or later
NVIDIA makes most of its money right now, however, from computer gaming. It's a big -- and growing -- market. My view is that this market will expand dramatically as virtual reality (VR) takes off. Like AI, VR is a perfect fit for NVIDIA's GPUs.
Admittedly, VR hasn't lived up the hype so far. In 2016, for example, less than 1% of PCs were able to support the top VR systems. Maybe 2018 will be the year where VR really takes off. Maybe not. I think the technology will catch on in a major way sooner or later, though.
The global market for VR and augmented reality (in which a real-world environment is supplemented with virtual images and data) could reach $215 billion by 2021, according to Statista's projections.A lower, but still promising, estimate from market research firm Grand View Research is that the VR market could reach $48.5 billion by 2025. Sure, folks are pretty much guessing right now, but the potential for VR is great no matter how you look at it. Chalk up another colossal growth opportunity for NVIDIA.
3. Whatever happens with bitcoin, blockchain won't go away
Then there's blockchain. The world has been abuzz lately about blockchain-based cryptocurrencies such as bitcoin, Ethereum, and Ripple. It's gotten so crazy that a small (and largely unsuccessful) biotech changed its name to include the word "blockchain," invested in a handful of tiny blockchain-focused companies, and saw its stock soar more than 500% in 90 days.
While I don't know what will happen with bitcoin and its peers, I don't think blockchain will go away. The underlying technology has significant potential to revolutionize financial transactions. And yet again, NVIDIA's products happen to be pretty useful with blockchain processing.
In the third quarter of 2017, NVIDIA stated that its PC original equipment manufacturer revenue increased by more than 90% primarily because of "strong demand for GPU products targeted for use in cryptocurrency mining." NVIDIA CEO Jensen Huang said on the company's third-quarter conference call that "the ideal platform for digital, new emerging digital currencies turns out to be a CUDA GPU," one of NVIDIA's products.
Now for a reality check: This is only a small part of NVIDIA's business right now. And as cryptocurrencies gain widespread adoption, the company's GPUs aren't as critical as customized chips enter the scene. However, as Huang said on NVIDIA's second-quarter call: "Cryptocurrency ... is here to stay. The market need for it is going to grow, and over time, it will become quite large."
Too steep a price?
You could argue that all of this potential from AI, VR, and blockchain is already built into NVIDIA stock's price. After all, shares currently trade at more than 45 times expected earnings. Was that too steep a price for me to buy NVIDIA? I don't think so.
Sure, I would have loved to scoop up shares at a more attractive valuation. My view, though, is that NVIDIA is a stock to hold for the long run. And over the long run, AI, VR, and blockchain could become much bigger than anyone can predict in 2018. I'm counting on it.