Supply chain disruptions sparked by the pandemic have created problems in numerous industries. For instance, automakers and consumer electronics companies are currently grappling with chip shortages, and those headwinds may last through next year. Of course, that particular problem has actually been a tailwind for chipmakers like Nvidia (NVDA 5.04%).
In fact, Nvidia's share price has skyrocketed 150% since the beginning of 2021 and 455% since the beginning of 2020. The company has a market cap of $814 billion as of this writing, making it the world's largest semiconductor business by a wide margin. But after those tremendous gains, is Nvidia stock still a smart buy?
Let's dive in.
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The leader in supercomputing
Nvidia specializes in accelerated computing. In 1999, the company invented the graphics processing unit (GPU), a chip designed to parallelize compute-intensive tasks. In other words, GPUs can perform thousands of calculations at the same time. For that reason, they are ideal for generating ultra-realistic video game graphics, and they are shaping the future of evolving technologies like augmented reality, virtual reality, and the metaverse.
However, GPUs also excel at handling complex data center workloads, such as analytics, artificial intelligence, and scientific computing. And last year, Nvidia reinforced its hardware portfolio with the acquisition of Mellanox, a specialist in high-performance networking solutions. That move made Nvidia even more relevant in the data center, expanding the scope of its products. But Nvidia does more than hardware -- it's a full-stack computing company.
To that end, Nvidia also provides a range of GPU-optimized software, such as TensorFlow for AI training, TensorRT for AI inference, and Rapids for data science workloads. It also offers a range of application frameworks that hasten development such as Merlin for recommender systems, Isaac for robotics, and Drive for autonomous vehicles. In short, Nvidia is an end-to-end solution for accelerated computing.
More importantly, it has established itself as the industry leader. Its compute platform powers eight of the top 10 supercomputers, and Nvidia holds over 90% market share in supercomputer accelerators. Those figures evidence its dominance in the data center, a market that management estimates will reach $100 billion by 2024.
Likewise, Nvidia chips are still the gold standard for gamers and graphics as it holds 83% market share in discrete GPUs for PCs and over 90% market share in workstation graphics.
Not surprisingly, Nvidia's financial performance has been impressive.
Data by YCharts.
A robust growth strategy
In addition to deploying Nvidia hardware in private data centers, clients can run workloads on Nvidia GPUs in every major public cloud, from Amazon Web Services to Tencent. And Nvidia recently added support for hybrid environments with the launch of AI Enterprise, a suite of software that allows businesses to virtualize AI and analytics workloads across private and public clouds. Virtualization software (in this case, VMware vSphere) creates a pool of resources from the underlying infrastructure, allowing clients to use physical hardware more efficiently.
To supplement its AI Enterprise suite, Nvidia offers two additional subscription products: Base Command and Fleet Command, which streamline the development and deployment of AI applications. Collectively, all three products are available through Nvidia LaunchPad, a program that provides businesses with immediate access to AI infrastructure.
However, the more exciting subscription product is Omniverse. This revolutionary platform took Nvidia nearly five years to develop, and it's finally live. Omniverse accelerates 3D workflows by enabling real-time collaboration among creators like architects, engineers, and game developers across a range of 3D design software. It also serves as a simulation engine capable of generating physically accurate synthetic data, meaning Omniverse can be used to train AI models that power autonomous robots and self-driving cars.
That's incredible, but those use cases only scratch the surface. For instance, Nvidia recently announced Omniverse Avatar, a platform capable of generating AI avatars -- digital automatons that can see, speak, think, and understand. That technology could revolutionize customer service and empower every person with an intelligent digital assistant. In short, Omniverse is a stepping stone to the metaverse, and Nvidia has already established itself as a key player.
More broadly, the company's foray into subscription software should translate into a stable revenue stream in the years ahead.
Image source: Getty Images.
Some concerns about valuation
Currently, Nvidia stock trades at 34 times sales, an incredible premium compared to chipmakers like Advanced Micro Devices and Intel, which trade at about 13 and three times sales, respectively. Perhaps more concerning, Nvidia's current price-to-sales multiple is two times higher than its average over the last three years (and the highest it has been in decades). Put simply, this stock looks very expensive.
On the flip side, Nvidia's dominance in accelerated computing has made it a key player in several emerging industries, from artificial intelligence and augmented reality to robotics and the metaverse. And the visionary leadership of founder and CEO Jensen Huang should keep the company on a good trajectory.
Looking ahead, I certainly think Nvidia can grow its business over the long term, but I'm less certain the stock can beat the market in the near term. For that reason, if you have plenty of time on your hands -- and you're prepared for volatility -- I think it's okay to buy a few shares today. But start small, and build a position slowly through dollar-cost averaging.
