Shares of NVIDIA (NVDA 1.56%) have climbed by 31% since the semiconductor company unveiled its newest data center chips at its investor day on April 12. The stock closed trading on Tuesday at $801, and some analysts think it can go even higher.
The analysts covering NVIDIA for Bank of America and Raymond James have both set a $900 price target on the stock, citing the company's momentum in the data center segment. What's more, NVIDIA recently received good news on its efforts to get its $40 billion acquisition of SoftBank Group's (SFTBF 0.06%) (SOBK.Y 0.45%) Arm Holdings approved in the U.K., with three major Arm customers giving the deal a thumbs-up.
Still, with its shares trading at a steep price-to-earnings ratio of 94, it's necessary to ask: Has the stock price risen too far, too fast? Here are three things investors considering buying NVIDIA shares now need to know about its growth prospects.
NVIDIA's Grace chip is the company's first CPU designed for the data center. Image source: NVIDIA.
1. Data center growth could explode
Selling graphics cards to gamers is still NVIDIA's largest revenue source, but analysts are more bullish about its prospects in the data center space. Bank of America Securities analyst Vivek Arya expects the data center segment to overtake gaming, bringing in an estimated $30 billion in revenue annually by 2025. Over the last four quarters, the data center segment generated $7.6 billion, so there are huge growth expectations here, which helps explain why the stock price is rocketing higher.
| Segment | Q1 Fiscal 2022 | Q1 Fiscal 2021 | Growth (Decline) |
|---|---|---|---|
| Gaming | $2.76 billion | $1.34 billion | 106% |
| Data center | $2.05 billion | $1.14 billion | 79% |
| Pro visualization | $372 million | $307 million | 21% |
| Automotive | $154 million | $155 million | (0.65%) |
| OEM and other | $327 million | $138 million | 136% |
| Total | $5.66 billion | $3.08 billion | 84% |
Data source: NVIDIA. NVIDIA's fiscal year runs through January.
NVIDIA's graphics processing units (GPUs) are used for a range of high-performance computing tasks, such as powering live-streamed video, artificial intelligence (AI) assistants, weather forecasting, medical imaging, and even fraud detection in financial services. At the company's 2021 investor day, NVIDIA unveiled its BlueField-3 data processing unit (DPU), which it built specifically for AI and accelerated computing. BlueField-3 delivers performance that is equivalent to up to 300 CPU cores.
NVIDIA's guidance for its fiscal second quarter calls for another record period of gaming and data center revenue. Analysts expect NVIDIA to report revenue growth of 49% for the current fiscal year.
2. Chances of the Arm acquisition's approval are increasing
Meanwhile, NVIDIA is making progress to get its proposed acquisition of Arm Holdings approved by regulators. It needs agreement from the U.K., China, the European Union, and the U.S., and when it announced the deal in September, it initially said getting all the necessary agencies to sign on could take about 18 months.
Three top customers of Arm -- Broadcom, MediaTek, and Marvell Technology -- recently threw their support behind the deal, which significantly raises the chances that NVIDIA will receive approval from the U.K.
Some other chip companies might feel that NVIDIA would have too much power if the acquisition goes through. Arm's chip designs are used in all kinds of electronic devices, including most smartphones and digital TVs. Citi analyst Atif Malik previously said there was only a 10% chance that NVIDIA would walk away with Arm, but after the recent show of support by top customers, Malik now sees a 30% chance that the deal will be successfully completed.
But NVIDIA still faces hurdles, especially in China, where Arm has a subsidiary that is partly owned by institutional investors in the region. Moreover, Arm's China business has been going through a leadership change, which complicates the deal being approved.
Despite these obstacles, NVIDIA CFO Colette Kress said at an investor conference in early June that "we are still expecting in the early part of 2022 to complete the acquisition of Arm."
3. NVIDIA has plenty of growth opportunities without the Arm acquisition
The addition of Arm would be a huge boost for NVIDIA, as it would allow the two companies to enter new markets that Arm's technology hasn't penetrated yet, such as data centers, the Internet of Things, and embedded devices.
As the chances for that deal occurring increase, growth estimates are creeping higher for NVIDIA's revenue and earnings per share. Analysts currently expect NVIDIA to report nearly $30 billion in total annual revenue by fiscal 2023 and EPS of $19.85. The stock is currently trading at a forward P/E of 40 based on fiscal 2023 projections, which is high for a semiconductor stock.
Even without Arm, the company is still well positioned for long-term growth. With the debut of NVIDIA's first data center CPU (Grace), the company now has a trio of products across CPUs, DPUs, and GPUs to pursue an estimated $100 billion opportunity in the data center market.
Given these massive growth opportunities, I believe NVIDIA shares are still a buy at current prices. If you buy shares and hold them for the long term, they should deliver a satisfactory return on your investment.
