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Is It Too Late to Buy Nvidia Stock?

By John Ballard – Aug 25, 2021 at 7:25AM

Key Points

  • Nvidia's gross margin is still on the rise, improving 70 basis points in the most recent quarter.
  • The entry into the software-as-a-service market could lead to "billions" in revenue, according to CEO Jensen Huang.
  • Only 20% of the GeForce installed base has upgraded to a RTX GPU.

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The company keeps reporting one great quarter after another, with more lucrative opportunities emerging on the horizon.

Nvidia (NVDA -1.51%) delivered another blowout earnings report last week, with revenue and earnings per share up 68% and 276%, respectively. The stock surged to a new high and has returned 70% over the last year. 

Analysts expect Nvidia to grow earnings per share at a compound annual rate of 30% over the next five years. If Nvidia delivers on those expectations, the stock could still deliver big gains from these levels. Here are three reasons why it's not too late to buy Nvidia stock.

Three Nvidia RTX graphics cards.

The GeForce RTX 30 series of gaming cards. Image source: Nvidia.

1. Improving gross margin

In the fiscal second quarter, non-GAAP gross margin improved by 70 basis points year over year to reach 66.7%. Management credited higher average selling prices for desktop GeForce gaming graphics processing units (GPUs). This trend is partly responsible for fueling Nvidia's gross margin over the last five years.

NVDA Gross Profit Margin Chart

NVDA Gross Profit Margin data by YCharts

An expanding margin indicates that Nvidia's competitive moat is widening. Nvidia commands the top market share spot in discrete add-in board GPUs. The latest report from Jon Peddie Research shows Nvidia's add-in board market share holding at 80% in first-quarter 2021, slightly down from 83% in the previous quarter, but up from 69% in Q1 2020. This is despite the efforts of competitor Advanced Micro Devices and its CEO, Lisa Su, to be more competitive in the market.

Nvidia is also a leading supplier of graphics chips for self-driving cars and data centers. It has racked up more than $8 billion of design wins in automotive now that some of the world's leading car manufacturers are using the Nvidia Drive platform to work on autonomous technology. 

Moreover, data center continues to look like a massive market for the company, with segment revenue up 35% year over year in the last quarter, which is on top of triple-digit growth in the year-ago quarter. 

The growth in the data center segment has been the primary driver of Nvidia's gross margin improvement in recent years, but with data center alone representing a potential $100 billion market opportunity, Nvidia's margin expansion story is not over. Trailing 12-month data-center revenue totaled just $8.2 billion. The long-term upside here bodes well for future earnings growth, which could justify a higher stock price. 

2. Software opportunity

Nvidia has increased its capital spending more than eightfold to $1.2 billion over the last five years. One of the results of that increase in investment is the recent unveiling of new software-as-a-service platforms, such as Nvidia AI Enterprise and Nvidia Omniverse.

The AI Enterprise platform will be offered either through a perpetual or annual license fee. It combines state-of-the-art software tools to help IT professionals bring AI solutions to market in a much shorter timeframe. It's currently in early access and will be available soon. 

Nvidia Omniverse will be available later this year on a subscription basis. It's a simulation and collaboration platform for graphics artists who work on 3D content, such as the virtual shared worlds that have driven increasing user engagement at Roblox. Omniverse essentially opens the door for Nvidia to ride the growing popularity of the metaverse that Roblox has helped bring into the mainstream.

How big is Nvidia's software opportunity? On the recent earnings call, CEO Jensen Huang said it "could represent billions of dollars of business opportunity for us." Most importantly, as software revenue increases, it should improve margins and bring a recurring revenue stream that can offset fluctuations in demand for hardware chips.

Investors tend to reward companies with long growth runways and recurring revenue streams with higher valuations, so these opportunities could justify Nvidia's expensive-looking price-to-earnings ratio of 52 based on this year's earnings projections.

3. Fastest gaming upgrade cycle in Nvidia's history

Despite ongoing supply shortages, gaming revenue jumped 85% year over year in the last quarter. Over 80% of Ampere-based GeForce gaming GPU shipments were from low hash rate chips. The latter were released earlier this year to discourage cryptocurrency miners from buying chips intended for PC gamers. Overall, the numbers show that Nvidia is experiencing very high demand from PC gamers.

A sharp fall in cryptocurrency prices in late 2018 caused a collapse in gaming revenue, but Nvidia is currently experiencing its fastest ramp in history with the new Ampere gaming graphics cards, and it's just getting started in this upgrade cycle. Management estimates that 80% of the GeForce user base has yet to upgrade to a RTX GPU. 

What's more, it's estimated that the number of PC gamers grew by 20% over the last year. So, Nvidia not only has millions of GeForce users who have yet to upgrade, but there are new players in the market that could point to more growth in the gaming segment, which is still Nvidia's largest revenue source.

Nvidia is still a good investment

Management is calling for revenue to increase by approximately 44% year over year in the next quarter. Nvidia is serving large markets that could keep the business growing for a long time. New opportunities in robotics, automated factories, and other advanced applications of its products are more great reasons to consider buying shares. So to put it simply, no, it is definitely not too late to buy Nvidia stock.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Nvidia, and Roblox Corporation. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nvidia Stock Quote
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Advanced Micro Devices Stock Quote
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Roblox Corporation
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