While the tech sector is witnessing a shift with artificial intelligence, machine learning and cloud computing changing the dynamics, players in this space are at the edge of their seats to continuously innovate and meet consumer demand. As the world moves away from the rather conventional setup with a huge IT team managing business needs, automation is taking over our lives.
In regard to Nvidia Corp. (NVDA, Financial), a graphics processing unit giant, the company’s latest product release has led to an impressive rally in the stock. Up nearly 15% in August and around 41% so far this year, the company's new Turing architecture-based GPUs have driven the optimism.
Being the world’s first GPU that enables real-time ray tracing, Turing has garnered immense attention and has made investors really optimistic about what the future holds. With exceptional lighting and shadow effects in a computer-simulated environment, ray tracing allows people to have a more realistic gaming experience. The feature will allow gamers to experience cinematic quality in video games. Fortunately for Nvidia, no other players in the space are currently offering a similar product.
Its closest competitor is Advanced Micro Devices Inc. (AMD, Financial), which is developing 7-nanometer chips. The chips have AI capabilities that could render somewhat similar graphics to Nvidia’s classic ray tracing GPU. Nvidia's product, however, stands out and is expected to greatly contribute to the company’s top line in the coming quarters. Moreover, owing to the new product offering, Nvidia will slash prices of its other high-end cards such as the GeForce GTX 1080 and 1080 Ti, stealing at least some of Advanced Micro’s market share.
Moving on to pricing, the GPU specialist announced three new cards using the Turing ray-tracing technology: RTX 2080 Ti priced at $999, RTX 2080 priced at $699 and RTX 2070 priced at $499. Just for context, even the cheapest of the lot, RTX 2070, is more powerful than the current most powerful card for gaming, GTX 1080 Ti.
Another bullish factor for Nvidia is its second-quarter earnings report. The company reported a 40% year-over-year increase in revenue to $3.12 billion and a 91% increase in earnings per share to $1.76. Moreover, while gaming is still the top performer for Nvidia, accounting for around 57% of its total revenue, the data center segment has also been gaining traction, accounting for around 22% of its revenue.
With the world shifting toward data, companies are leveraging artificial intelligence analytics to understand patterns in consumer behavior. As a result, Nvidia is seeing massive demand for its data centers. Moreover, with the development of autonomous driving, Nvidia’s GPU technology is sure to be a success.
In regard to valuation, Nvidia currently has a forward price-earnings ratio of 37.04 as compared to Advanced Micro’s 54.64. Moreover, GuruFocus rated the company's profitability and growth 9 out of 10 and its financial strength 8 out of 10. It has an operating margin of 37.21%, which is above the industry median of 6.76%. Moreover, its return on equity stands at 59.24%, above the industry median of 7.07%.
Despite Nvidia’s valuation outperforming the industry, extremely strong fundamentals coupled with industry factors makes the case for the bullish sentiment for the stock. Moreover, as the big-budget game season unfolds this fall, Nvidia is expected to see massive orders and revenue coming its way, supporting the investment proposition.
Disclosure: I do not own any of the stocks mentioned.
