4 Compelling Reasons Nvidia Is My Newest Stock Buy

Nvidia (NVDA 6.18%) is already a dominant industry leader, but can it get bigger over the next 20 years? In this video clip from "The Rank" on Motley Fool Live, recorded on June 6, Fool.com contributors Jamie Louko and Jason Hall examine several key factors that will drive the technology company to greater heights in the future.

Jamie Louko: It is, you know, a market dominator in the GPU, graphics processing unit space. It's a chipmaker and it's in a lot of these really important industries or at least industries that I think are going to be much bigger 20 years from now than they are today. Things like gaming, data center, automotive, not necessarily all vehicles, although it does do that, but more autonomous driving, artificial intelligence, visualization, and they are a leader in most of these markets.

They are the No. 1 in PC gaming with more than three times the revenue than other GPU vendors. In terms of graphics, they have about 90% market share. They are the leader in deep learning AI markets. Also supercomputing with 355 of the top 500 companies in the space. They're dominant in so many of these industries that I think are going to be much bigger going forward.

For example, the gaming market is worth about $100 billion today and Unity (U 3.47%) a company I just talked about, expects this industry to grow to $300 billion by 2027. That's just an example of, I really think that Nvidia is this leading gold standard pick and shovel play into all of these industries that I am very bullish on, and instead of trying to pick which companies I believe are going to succeed in each of these industries, I think that Nvidia is that company that will enable all of these industries to flourish and just Nvidia will benefit from all of this growth going forward.

Not to mention [laughs] its financials are stellar. Revenue grew 42% to $8.3 billion in a quarter not to mention, its impressive free cash flow and net income. Now, its net income decreased 15% year over year, but that was because of the Arm acquisition that fell through. It was planning on acquiring Arm that got terminated, it got denied, and therefore, it had a tax impact of about $1.4 billion.

Jason Hall: It had a bad breakup. Big breakup fee.

Louko: Yeah $1.4 billion breakup fee, Jason. If you exclude that, their non-GAAP, net income margin was 41% for the quarter, really strong there. They are generating tons of free cash flow, which is what I love to see. They're going to be able to reinvest that into gaining more market share, continuing to innovate keep that gold standard status so what's the concern?

Really for me, the main concern is valuation. Their price of free cash flow, their price-to-earnings ratios are through the roof, even their price-to-sales ratio is above 16 times sales. This is not a cheap company, but for me personally, when it comes to high-quality businesses like this, I tend to not care about valuation, and I'll just invest multiple times as the company gets a lower and lower valuation. It's a company that I want to own and I was going to try to buy it today, but alas so [laughs] that's why I ranked it No. 1 today.

Hall: I ranked this lower than anybody else and it was entirely on valuation. Everything Jamie said is absolutely true. It is a wonderful business. It's going to be more important 10 years from now than it's ever been, but it trades for 61 times free cash flow.

Even adjusting for that it's the breakup money, it's a very expensive stock. If your time horizon is long enough, that risk of overpaying goes down. Particularly, like Jamie was saying if you can buy more and more over time. I added to this one in February, wish I had waited a little bit that's the only reason for me I ranked it as low as I did.