Nvidia Stock May Be Best-in-Class Among Chip Stocks

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Despite facing a series of headwinds, Nvidia (NASDAQ:NVDA) looks set to finish the year on a high. Nvidia stock has already risen more than 60% in 2019, but the firm could have further to climb in 2020.

Nvidia Stock May Be Best-in-Class Among Chip Stocks

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This week Nvidia stock saw a bump after Morgan Stanley’s Joseph Moore upgraded the chipmaker to Equal-Weight from Overweight. Moore also increased his price target for NVDA to $259 from $217.

This year has been a turbulent one for the majority of chipmakers, with NVDA riding out the storm largely in the middle of the pack. The industry has been plagued by worries about the ongoing trade war between the U.S. and China as well as worries about the cyclical nature of the semiconductor space. 

Like most of its peers, Nvidia’s stock price has been on a rollercoaster for most of 2019. The firm was hit hard by uncertainty about a trade deal over the summer as well as concern about rising competition from rival chipmakers. However, as rhetoric between Washington and Beijing continues to improve, investors have started to return to NVDA stock.

NVDA’s end markets hold a lot of potential growth for the firm if it’s able to execute on its strategy. Right now, the firm is the GPU leader in both data center applications as well as gaming, both of which are set to grow exponentially in the coming years. 

Diversity and Nvidia Stock

Gaming is one area that could see impressive growth in 20202. NVDA’s Tegra SoCs chips have been commissioned by Nintendo for the Nintendo Switch and Switch Lite— which is likely to see strong demand through the holiday quarter and through 2020, this boosting Nvidia’s gaming arm, 

Nvidia stock is also likely to see momentum in its data center business in 2020, where its GPU’s have the upper hand against competitors like Advanced Micro Devices (NASDAQ:AMD). In the third quarter, NVDA’s data center revenue was up 11% from the previous quarter, but sales were down 8% from the year-ago quarter.

That weakness did very little to dull the shine of NVDA stock, an unexpected outcome according to Moore. The firm’s most recent quarterly results may not have been spectacular, but the stock seemed to shake off any negativity. 

“Both gaming and data center fell short of expectations over the course of 2019, and we were surprised at how well the stock was doing in light of that”

Further to Climb

However, with NVDA stock trading above $221 per share, investors might be wondering if they’ve missed the boat. The answer to that depends on your timeline.

In the near term, NVDA’s valuation makes for a risky bet. Nvidia stock has the potential to nosedive if it doesn’t live up to the hype. That’s particularly true in the semiconductor space, where suppliers like NVDA depend on their customers’ inventory management in order to maintain demand.

More disappointment is likely in-store, according to Nvidia’s own forecasts. The firm is forecasting revenue between $2.89 billion and $3.01 billion for the current quarter, below analysts’ expectations.

For those looking further out into the future, NVDA stock could be a great choice among chip stocks. Aside from data centers and gaming, Nvidia has growth opportunities in other fast-growing tech spaces as well.

The firm has emerged as a formidable competitor in the Artificial Intelligence space, and its autonomous driving arm has also been acknowledged as a top-class competitor.

The Bottom Line on Nvidia Stock

The semiconductor space is a bumpy one no matter how you slice it, but this year we’ve seen chip stocks rise considerably. Those rich valuations make it riskier to add semiconductor plays to your portfolio.

However, for those that are comfortable with some turbulence— NVDA looks like one of the best buys. 

While NVDA certainly has a high valuation right now, it looks justified for the long term. As Moore put it, “All semiconductor stocks are at a premium multiple on 2020 earnings, but across the group, we see Nvidia as having one of the best opportunities to maintain a high multiple as we shift to 2021.”

Nvidia stock could lose ground if its earnings disappoint in February, offering investors a better entry point. However, there’s no guarantee the firm won’t hold on to its most recent gains so now could be a good time to start building a position in NVDA stock.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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