NVIDIA (NVDA -10.01%) stock has more than doubled in 2020 as the graphics specialist has delivered terrific growth in its data center and video gaming businesses. Smartphone giant Apple (AAPL -1.22%) has also made investors substantially rich this year despite the challenges posed by the coronavirus pandemic.
The outperformance displayed by these two companies while the broader market has remained subdued isn't surprising. NVIDIA provides graphics chips that play an important role in powering a wide variety of critical applications, from data centers to computers. It is one of the pioneers in the field of artificial intelligence (AI) -- a market that is in its early stages of growth. Apple, on the other hand, has diversified beyond smartphones and is eyeing new markets to enhance its user base.
It wouldn't be surprising to see both tech giants remain on top of their game even after a decade, as they are expanding into new areas to ensure long-term growth. Let's take a look at them.
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NVIDIA can shape the future with its graphics cards
It's been more than a decade since I built my first PC (personal computer), and an NVIDIA graphics card was an important part of that setup for playing resource-intensive games. The story remains the same in 2020, with an NVIDIA GPU (graphics processing unit) adding muscle to the current setup, but the company has come a long way. It no longer just makes GPUs for gaming.
NVIDIA has unlocked more applications for its GPUs over time. They now power data centers, supercomputers, cars, and are even used to mine cryptocurrencies. The datacenter is now NVIDIA's biggest business with 45% of the total revenue in the second quarter of fiscal 2021 -- producing $1.75 billion in sales during the latest quarter as compared to only $151 million four years back.
This indicates that NVIDIA can find new applications for its graphics cards that can handle several complex calculations in a parallel manner. And it makes NVIDIA's GPUs ideal for enabling AI technology -- a market that's reportedly going to require chips worth hundreds of billions of dollars in the coming years.
According to a third-party estimate, the AI chip market could grow from just $5.6 billion in 2018 to more than $83 billion in 2027 at a compound annual rate of 35%. Hardware accelerators such as GPUs are expected to remain in strong demand for AI training and inferencing in the data center -- an opportunity that could be worth as much as $15 billion ($5 billion for AI training hardware and $10 billion for inferencing hardware) by 2025, per McKinsey's estimates.
NVIDIA is preparing to tap into that opportunity with its A100 data center GPU that is based on the Ampere architecture. The chipmaker pointed out on the latest earnings conference call that the A100 can integrate both AI training and inferencing, and it has already racked up an impressive list of clients.
The A100 delivers NVIDIA's greatest generational leap ever, boosting AI performance by 20x over its predecessor. It is also our first universal accelerator, unifying AI training and inference and powering workloads, such as data analytics, scientific computing, genomics, edge video analytics, 5G services, and graphics.
The likes of Google, Microsoft, Amazon Web Services, Alibaba Cloud, Baidu Cloud, and Tencent Cloud have been offering AI solutions based on the A100. Additionally, more than 50 servers based on the platform are expected to be launched by the end of the year from the likes of Cisco, Dell, Hewlett Packard Enterprise, and Lenovo.
As such, NVIDIA is gearing up to mint billions from the lucrative market for AI chips in the coming years. The company is also sitting on other catalysts, such as autonomous cars and a massive upgrade cycle in PC graphics cards. In all, it can be concluded that NVIDIA's growth engines aren't going to die out anytime soon and the stock could continue outperforming the broader market.
Apple's services ecosystem could be a money-spinner for years to come
Apple has remained sharp in the smartphone game since introducing the first iPhone in 2007. The company is the world's third-largest smartphone vendor with a market share of 13.6% at the end of the second quarter of 2020, according to IDC.
But Apple is not just about smartphones -- it now has five streams of revenue spanning both hardware and service offerings. The company has diversified into other hardware over time, such as wearables and smart home accessories, but its services business is the one that's worth looking out for.
While the iPhone still accounts for a lion's share of Apple's total revenue, the services business has displayed impressive growth over the years. In the third quarter of fiscal 2020, the services business accounted for 22% of the total revenue and recorded 15% growth over the prior-year quarter. Meanwhile, the company's iPhone revenue increased just 1.6% year over year.
The impressive growth in the services business helped Apple increase its overall revenue by 11% and earnings per share by 18%. Looking ahead, Apple is expected to maintain the impressive pace of growth in the services business thanks to the launch of multiple new offerings last year. The company had recorded 16% growth in services revenue in fiscal 2019 to $46 billion, and it has done close to $40 billion in revenue in the nine months of the current year.
Daniel Ives of Wedbush estimates that the services business could produce $60 billion in revenue in 2021, and that isn't surprising as it now offers a host of services such as Apple TV+, Apple Arcade, and Apple Card. For instance, Apple has priced its video streaming service affordably when compared to rivals and offers a free one-year subscription with the purchase of an Apple device.
What's more, the company is going all out to bring more users into its services ecosystem with the Apple One bundle that will include multiple services for a discounted monthly price. This could give the company's services business a nice shot in the arm, considering that it is reportedly going to launch new 5G iPhones to cut its teeth in a lucrative space.
As it turns out, 5G smartphones are expected to sell like hotcakes, as there are reportedly millions of iPhone users who could upgrade their devices once the new generation iPhones are out. This could help Apple bring more users into its services ecosystem and generate recurring revenue over the long run, even when hardware sales flatten.
More importantly, services growth should ideally boost Apple's earnings power in the long run. The services business accounts for just 11.6% of Apple's total cost of sales but produces nearly 39% of the gross profit. More specifically, services delivered just over 67% in gross margin last quarter, which was more than double when compared to the 29.7% gross margin of the products business.
In all, Apple could deliver a solid combination of hardware and software growth in the coming years and remain a top growth stock thanks to the 5G revolution and a bigger services user base.
