From 2016 to 2018, NVIDIA (NVDA 1.20%) stock rallied as the success of cryptocurrencies increased demand for NVIDIA Graphic Processing Units, or GPUs. Then bitcoin lost value and demand for GPUs reversed, taking NVIDIA's stock price down with it.
With the crypto crash behind it, NVIDIA rose 81% in 2019, making it one of the year's best stock picks.
So will NVIDIA continue the run? And if so, what are the catalysts?
High Performance Computing supercharges the future
This is an exciting and pivotal time for NVIDIA. The company remains at the forefront of gaming, with advanced GPUs providing ever more fantastic gaming experiences.
But the next frontiers lie in data center, artificial intelligence (AI), and automotive applications. Key to success in running advanced applications is NVIDIA's High-Performance Computing (HPC) technology, which is based on GPU-accelerated computing. It aggregates computing power using parallel supercomputers to deliver higher performance in increasingly complex applications.
The HPC market is poised for dramatic growth, and NVIDIA is uniquely positioned to meet demand. The HPC-related market is expected to reach a value of almost $50 billion by 2025, from $35.8 billion in 2019. NVIDIA anticipated AI and HPC applications and built out platforms serving cloud, AI, and data analytics, among others.
Mellanox acquisition magnifies NVIDIA potential
In March of 2019, NVIDIA reached an agreement to acquire network equipment company Mellanox for $6.9 billion. According to NVIDIA, the acquisition unites "two of the world's leading companies in high performance computing (HPC). Together, NVIDIA's computing platform and Mellanox's interconnects power over 250 of the world's TOP500 supercomputers and have as customers every major cloud service provider and computer maker."
Closing the Mellanox deal has taken longer than expected due to trade war pressures with China. Chinese regulatory bodies delayed approving the deal in 2019, but with easing trade war tensions, approval is anticipated in early 2020.
NVIDIA has emerged from the dust of the cryptocurrency crash and is definitely on the right track. The company has a high forward P/E ratio of 56, but I consider the valuation justified in light of the fundamental development.
Competitive pressures heat up the chip market
NVIDIA's main competitor in the GPU sector is Advanced Micro Devices (AMD 3.99%), which sports a forward P/E ratio of 53. In 2019, Nvidia fought off Advanced Micro Devices in GPUs. At one point NVIDIA's market share dropped below 70%, but with the success of the RTX line the company regained much of the market share lost.
Competitive pressures from Advanced Micro Devices on both price and performance in GPUs will continue to challenge NVIDIA, but NVIDIA is well positioned to meet the challenge and prevail on its own terms.
NVIDIA is at the forefront of the Internet of Things (IoT). NVIDIA's EGX Edge Supercomputing Platform, a cloud-based product merging AI and 5G networks, is already allowing companies to harness rapidly streaming data for decision-making in everything from production to customer services.
The ecosystem build-out in HPC applications and platforms, combined with the Mellanox acquisition, are what will power NVIDIA forward and make NVIDIA -- over the long term -- a millionaire maker stock. Investors will be well rewarded for building positions in this tech pioneer.