Nvidia on Thin Ice Due to Coronavirus, but It’s a Fundamentally Sound Story

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No corner of the technology sector has been immune to the coronavirus-induced drubbing stocks have endured this month. That’s particularly true of semiconductor names. This month, the PHLX Semiconductor Sector Index is down 27.3%.

Two Big, New Threats That Should Make Investors Worry about NVDA Stock

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As if that’s not bad enough, Nvidia (NASDAQ:NVDA), one of that benchmark’s largest components, is lower by more than 13% over just the past week. NVDA stock is down 4.75% year-to-date, significantly less bad than the 23.4% shed by the PHLX Semiconductor Sector Index, but Nvidia’s recent slide accentuates the weakness in the chip space at the hands of the COVID-19 pandemic. This logically gives investors pause about embracing this stock right here, right now.

Beyond the coronavirus, data suggest rival Advanced Micro Devices (NASDAQ:AMD) is eating into Nvidia’s share in the graphic processing unit (GPU) market. In the fourth quarter of 2019, AMD’s deliveries of those chips jumped 22.6% on a sequential basis while Nvidia saw its deliveries drop 1.9%, according to John Peddie Research (JPR).

Add to that, the GPU arena is becoming increasingly competitive with Intel (NASDAQ:INTC) entering the space. It would appear that, at the moment, NVDA stock has some strikes against it, but there’s more to the story. That could be encouraging for investors viewing the latest pullback as a potential buying opportunity.

Catalysts Abound for NVDA Stock

While Nvidia is ceding share in the GPU market, the data center market, which ties into the company’s cloud computing and artificial intelligence opportunities, remains robust and a source of allure for prescient investors.

In the fourth quarter “data center revenue grew considerably, as customers leverage both Nvidia’s training and inference GPUs key AI applications such as natural language understanding, conversational AI, and deep recommendation engines,” said Morningstar in a recent report.

On its earnings conference call, Nvida management extolled the virtues of its data center business.

“On the growth drivers for the Data Center segment, which currently gets about half its revenue from cloud giants (hyperscalers) making large AI-related investments and the other half from “vertical industry” clients using Nvidia GPUs for AI and traditional high-performance computing (HPC) workload,” said CFO Colette Kress.

The data center market is experiencing exponential growth. The more properties pop up, there’s an increasing runway for Nvidia to bolster share. In 2018, there were 7,500 data centers, a number that jumped to 9,100 last year and is expected to top 10,000 this year.

The increased build-out of hyperscale data centers – the types needed by cloud computing giants such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) – is potential boon for Nvidia. With those two and others tussling for cloud dominance, that provides a platform for Nvidia to grow and cement dominance in the data center market.

Bottom Line: Don’t Forget AI

Another massive growth frontier for Nvidia – one mentioned above in relation to data centers – is artificial intelligence (AI). The soon-to-be-completed purchase of Mellanox (NASDAQ:MLNX) cements Nvidia as an AI leader.

More recently, Nvidia announced the bolt-on buy of SwiftStack, a provider of cloud storage solutions, which help the former bolster machine learning offerings. Additionally, Nvidia’s AI customer roster is impressive and growing running the gamut of transportation companies to DoorDash.

Yes, the COVID-19 outbreak represents near-term downside risk to NVDA stock, but the company’s positioning in marquee growth markets will be longer-lasting than this pandemic, making Nvidia a credible buy on further weakness candidate.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

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