NVIDIA (NVDA 2.54%) is one of the most important tech companies to be watching right now. The semiconductor giant doesn't just top its own industry -- it's one of the world's top 10 most valuable companies by market cap. But the company has lost 20% of its value this year, after it abandoned a planned acquisition of chip designer Arm after running into regulatory issues. However, this shouldn't pose long=term issues: Arm isn't essential to NVIDIA's business, since NVIDIA's existing business already has what it takes.
It's still putting out high-quality products in its existing top revenue source (graphics chips for gaming), but the company hasn't stopped there out of complacency -- it's also pursuing innovative growth opportunities in plenty of additional markets.
The star of the show
NVIDIA's core offering, its graphics chips, are considered some of the best or the best on the market, depending on who you're talking to. The ongoing chip shortage has affected supply so badly that Best Buy (NYSE: BBY) days ago announced that it would only let customers buy an in-demand NVIDIA graphics card if they paid the retailer $199 to join its Totaltech membership program. (Some buyers certainly made back that cost by reselling the cards.)
Nvidia doesn't need to worry about its inventory sitting around -- what it makes, it sells. High demand and low supply reflects positively on NVIDIA's situation, especially since significant reselling activity could give NVIDIA room to raise its prices while still selling out. NVIDIA may end up following the example of luxury brands, which have repeatedly hiked prices during the pandemic without cannibalizing demand.
However, NVIDIA has its sights set on more than the gaming PC space. In January, the Meta (NASDAQ: FB) Research Supercluster selected NVIDIA to partner on an AI research supercomputer, and Jaguar Range Rover in February announced all new vehicles will be built with NVIDIA AI chips starting in 2025. NVIDIA also creates data center products and is involved in self-driving car technology. Data center products are an enterprise-level business diversifying NVIDIA from only being a consumer product company, and self-driving technology is becoming an arms race. NVIDIA's work there seems like a sign that the company's not only aiming up, but forward.
Looking towards the future with AI
NVIDIA is moving from being a pure hardware company to offering hardware, software, and AI solutions. Its hardware experience sets it up well, but other companies are also aiming to dominate the intersection of chips and AI. Rivals include industry heavyweights like Apple and Intel, plus more chip-focused operations like AMD.
NVIDIA has forecasted that the global chip shortage will ease up in the second half of this year. However, while the state of the supply chain can be estimated, it can't be predicted with total certainty, given the general chaos of the pandemic. Depending on how the supply chain situation evolves, it may be more advantageous to invest in Apple and Intel, which derive more significant amounts of their business from other products and services.
The chip shortage is especially important, since that these products drive so much technology. NVIDIA demonstrates leadership in this important space, as well as growth potential with its diversification into AI. The business is innovative and backed by strong consumer demand, indicating that its high valuation should remain stable in the long run, despite recent bad news. NVIDIA is an interesting company because it's already so successful on its core gaming product, even as it aggressively expands into other areas. It's unlikely the company will ever abandon gaming; instead, its other business lines are positioned to add onto gaming revenue, creating an even more valuable and profitable business.