NVIDIA Stocks: Do They Promise Growth?

NVIDIA Stocks: Do They Promise Growth?

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Investors still remember it too well, how the crypto market provoked steep growth of NVIDIA stocks (NASDAQ: NVDA). Since the 2000s, the company has been the leader in the market of accelerator cards (graphics card), but its stocks have never cost over 35 USD.

It was 2015 when NVIDIA stocks started growing. Everything changed. Cryptocurrencies sky-rocketed, which made mining profitable, increasing, in its turn, the demand for graphics cards noticeably.

As a result, NVIDIA stocks started growing in 2015 because graphics cards turned out to be a deficient good. Three years later, the stocks grew by 1,400%.

Investors expecting a new 2015

These days, cryptocurrencies are again growing noticeably, and investors once more turned to NVIDIA waiting for its stock price to grow as last time. However, for some reason, the stocks do not react as in 2015.

Since December 2020, the price of the Bitcoin cryptocurrency has doubled, while NVIDIA's stock price remained without a change.

BTC and Nvidia correlation

We can now suppose that the stocks are accumulating growth potential. However, the actual reason is the unwillingness of the management to count on mining. Their key markets are the gaming and car ones.

Counting on the gaming market

As early as in 2018, when the attention of investors was glued to NVIDIA, its management stated that they realized too well why the demand for graphics cards had grown. The management also highlighted that if the price of cryptocurrencies dropped, the market would be flooded with graphics cards because for some people, mining would turn out unprofitable in the short term — all that would deteriorate the financial performance of the company. Hence, NVIDIA concentrated its efforts on graphics cards for computer games. And it was no mistake.

The financial report for the 4th quarter of 2019 (when the crypto fever was over) demonstrated a decline in the income by 43%, from 3.1 to 2.2 billion USD, while the stocks dropped by over 50% in two months.

When investors saw the direction of the company's further development, the stocks started growing gradually. Now they cost over 500 USD.

NVIDIA income increased 4 times

Seems expensive? It might be. Let us have a look at the growth of the company's income.

In 2014, a year before the stocks started growing, the company earned 1.10 billion USD a quarter on average. By 2020, the income has increased by 4.7 billion USD — which is almost four times' growth. However, this is incomparable to the stock price growth because the latter amounts to 20 times. Hence, the income does not explain such a significant increase.

What is the reason for such an increase in NVIDIA's stock price? Let us start with computer games.

The pandemics of the coronavirus helped the gaming market to develop. An online gaming service Steam notes that since 2018, the number of their users has doubled, while YouTube reports users to watch over 100 billion hours of gaming content. As a result, since last year, NVIDIA's income in the gaming sector grew by 37%, while this sector brings 48% of the company's overall revenue.

According to the company's vice-president Jeff Fisher, vaccination will not stop the growth: “More people are gamers [now] – they’ve experienced it and gotten into it. I think that just continues to build afterwards”.

NVIDIA announced laptops with GeForce RTX 30 Series

On January 12th, 2021, NVIDIA announced that from then on, over 70 types of laptops will be equipped with new графический процессор GeForce RTX 30 Series. Fisher claims such laptops to be 30% faster than PlayStation 5.

Also, the company has created a new generation of Max-Q technology that provides for the maximal performance of portable and light gaming laptops. Hence, NVIDIA widens its sales market by offering gaming laptops. Hence, “heavy” games will be leaving PCs.

However, the company does not forget about PC updates either: it has created a new graphic processor for the GeForce RTX 3060 graphics cards for an affordable price of 329 USD.

The crypto market brings additional income

Alongside the gaming market, the crypto market also revived, bringing additional revenue to the company in the third quarter of 2020. Reports go that in Q3, income from selling graphic cards for mining reached 175 million USD. It is fairly logical that in the fourth quarter when cryptocurrencies sky-rocketed, miners got even more active, which should increase the company’s profit in this segment at the end of the quarter.

Another reason for an increase in the demand for graphic cards will be the upcoming technical changes in Ethereum mining that will require hardware updates from market players.

The ETH is now one of the most popular cryptocurrencies among miners, thus the demand will be significant.

A deficit of graphic cards

In the second half of 2020, there was a deficit of graphic cards in the market. This was due to tp the pandemics that influenced production volumes; in particular, there was trouble with the supply of semiconductors for graphic cards.

Also, several new games requiring the better performance of hardware appeared in the market. At the end of the year, the crypto market created additional demand for graphic cards. Hence, we have a so-called pending demand for 2021 that was not fully satisfied in 2020.

A lot of new games provoke the company to enhance production, which will naturally cause a positive effect on the future income of the company.

All this makes it clear why the stock price of NVIDIA is growing. However, this is not enough to rid us of the suspicion that the stocks are overbought. The market lives on expectations, so the revenue from the growth of the gaming market might be already included in the price.

Well, the reason for the growth is clear, we now need to find the reason for which the stock might go on growing.

The electric car market helps us out.

NVIDIA and car-makers

The Chinese market is considered to be the largest car market in the world. This is the country in which the interest in electric cars is the highest. Local companies - NIO Limited (NYSE: NIO), XPeng (NYSE: XPEV), and LI Auto (NASDAQ: LI) – doubled their sales in 2020, the overall volume reaching 103,000 cars.

In January, NIO announced soon appearance of a supercomputer Adam based on NVIDIA DRIVE Orin. Adam performs over 1,000 trillion operations a second which is more than enough for safe and autonomous driving. Adam is going to first appear in the NIO ET7 sedan, the production of which is scheduled for 2022. Later the computer will be installed on all NIO cars.

As early as September 2020, Li Auto promised to design all its cars based on NVIDIA DRIVE AGX Orin in the future. This is meant for introducing systems of safe autonomous driving in the company’s car park.

XPeng electric cars use NVIDIA products for its Xpillt 3.0 autonomous driving system.

Also, among its clients, NVIDIA boasts Mercedes-Benz, Volvo, Uber, Volkswagen, Toyota. Also, it works with a German supplier of spare parts for cars ZF Friedrichshafen AG that unites the 15 largest car part suppliers in the world. Their cooperation is meant for creating a ready-to-use platform for autonomous AI-based vehicles worldwide.

Hence, NVIDIA is step by step occupying a significant space in the market of autonomous vehicles. Hence, we can suppose that the perspectives of further stock price growth are connected to the growth of the car market. In this case, 500 USD per stock does not look like an overbought price. However, investors still do not hurry to buy the stocks.

Tech analysis of NVIDIA stocks

The quotations are trading above the 200-days Moving Average, which indicates an uptrend. However, tech analysis also shows certain doubts in further growth. Investors might consider 550 USD per stock an overbought price.

As a result, since November 2020, NVIDIA’s stocks have been trading between 550 and 514 USD per stock. Even a good quarterly report and dividend payments could not push the price above 550 USD.

Tech analysis of NVIDIA stocks

The financial report for the 4th quarter is due on February 17th only. Expectations are optimistic but will be included in the price at the beginning of February only. Thus, investors seem to be in no hurry to buy the stocks, waiting for rumors about the report.

The current decline can be interpreted as a good opportunity to buy the stocks at a lower price. The first support is 514 USD. If this level is broken away, the quotations might fall deeper down to 476 USD. In the end, these two levels might be good entry points.

Closing thoughts

For short-term speculations, try to buy as close to the 200-days MA as possible.

Here, we recommend long-term investing. NVIDIA has sources for further growth of income, which are the gaming market and electric car sphere. Cryptocurrencies here are a kind of unpredictable, additional income source.

The electric car market can grow significantly in the nearest future as car-makers report quarterly increases in sales of electric cars by dozens of percent. Hence, your investment horizon in NVIDIA must start from a year. Quarterly reports in 2021 will show how the income reacts to the work with the electric car market. If the trend is positive, the stocks will go on growing, and sometime later, the current price will not seem that high anymore.

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