When it comes to red hot technology stocks, Nvidia (NASDAQ:NVDA) stock is leading the pack.

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Nvidia has hit all-time highs several times in the past month and has more than doubled in the past year, reaching $395 a share. The rapid ascent has left analysts scrambling to revise their price targets on NVDA stock.

The consensus forecast of 38 analysts, many of which have been revised since June 1, calls for a median target of $400, with a high estimate of $450 and a low estimate of $240. All 42 ratings on NVDA stock are currently a “buy.”

The upward trajectory in NVDA stock is due to two critical factors.

First, Nvidia remains a market leader in the red hot sector for graphics processing units (GPUs) that power video games. Second, Nvidia is positioning itself to move beyond gaming and into new growth segments such as cloud computing and artificial intelligence.

This combination is setting up the Santa Clara, California-based company for robust growth in the coming years as its microprocessors are used in everything from personal computers and laptops to self-driving cars and supercomputers.

And while Nvidia faces tough competition from other micro-processing companies such as Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC) and Marvell Technology Group (NASDAQ:MRVL), industry observes agree that the company’s diversification strategy is the right one and should set the company up for future success.

Next Generation Gaming

When it comes to Nvidia’s core gaming business, growth continues at a brisk pace. The company’s gaming business generated revenue with an 11% compound annual growth rate (CAGR) over the past three years.

Nvidia claims that more than 200 million gamers use its GeForce platform, which include GPUs that run on personal computers, laptops and the proprietary GeForce Now cloud gaming service. GeForce Now currently has more than 1 million subscribers and counting.

However, most GeForce users are running video games on old Nvidia graphics cards and are due for an upgrade. In fact, Nvidia estimates that 90% of its customers are currently using a GPU whose performance is below its top level GTX 1660Ti graphics card that is widely viewed as among the best available today and needed to operate high-end graphics-intensive PC games that are expected to hit the market in time for Christmas this year.

This means that the majority of Nvidia’s installed user base are expected to upgrade their graphics cards to ensure they can play next-generation video games. This should lead to a sharp rise in Nvidia’s gaming business moving forward.

Sustained growth in the video game segment is critically important as it produced 43% of the Nvidia’s total revenue in the fiscal first quarter and continues to be the main engine propelling the company forward. Past upgrades of Nvidia graphics cards in 2016 and 2018 helped to drive sales as customers moved to enhance their gaming experience.

Also important is the pricing of Nvidia’s gaming related products. The company has been hugely successfully when it comes to raising and setting prices. Nvidia says that the average selling price of its graphics cards increased at a CAGR of 14% over the past five years.

The company has huge pricing power in the GPU market and has no problem setting the bar for both performance and price.

New Frontiers

While industry observers applaud Nvidia’s continued leadership in the gaming sector, they are most excited about the new directions in which the company is moving. Nvidia is diversifying into a number of cutting-edge new spaces that offer the potential for massive future growth.

In the area of artificial intelligence, Nvidia has been making inroads with self-driving cars, entering into a partnership with with Daimler (ETR:DAI) to equip the Mercedes-Benz fleet with self-driving technology by 2024. Nvidia’s automotive revenue has grown 22% over the past five years.

When it comes to cloud computing, Nvidia is developing a robust data center business that provides GPUs and other components to cloud-based data storage centers. Nvidia’s data centers are used by major cloud providers such as Amazon’s (NASDAQ:AMZN) AWS and Microsoft’s (NASDAQ:MSFT) Azure.

In its first fiscal quarter of this year, Nvidia’s data center division generated a record $1.1 billion of revenue. That result helped Nvidia grow total quarterly revenue 39% year-over-year to $3.1 billion. The company further bolstered its data center business in April by completing the acquisition of Mellanox Technologies, a supplier of components used to improve data center efficiencies. The acquisition sent NVDA stock soaring.

A Stellar Balance Sheet for NVDA Stock

It had cash on hand totalling $16.4 If the success in gaming and entering new markets weren’t enough to interest investors, Nvidia’s balance sheet also stands out. The company posted a record gross margin of 65.1% in the first quarter, up from 58.4% in the same period of 2019, and reprted total assets of $23.3 billion, more than double its total liabilities of $10.2 billion.billion, up from $10.9 billion in the fourth quarter of last year.

Nvidia has also publicly reaffirmed its commitment to pay out its dividend during the Covid-19 outbreak, and was brave enough to provide second-quarter guidance at a time when many companies withdrew guidance due to the economic uncertainty created by the global pandemic.

Second-quarter revenue is forecast to reach $3.65 billion, an increase over last year’s $2.6 billion second quarter revenue.

The Bottom Line on NVDA Stock

Nvidia is a standout company in almost every respect. Few companies in the technology space are better positioned for consistent, long-term growth. Nvidia’s technology is widely used in today’s advanced computing, with many people speculating that Nvidia’s technology is becoming indispensable. This fact bodes well for the company and should ensure big investment gains for many years to come.

While it is true that there is a lot of competition in the GPU segment, Nvidia is well-positioned to fend off its competitors and thrive.

Investors who are looking for a dependable technology company with big upside potential should grab NVDA shares before they become more expensive.

As of this writing, Joel Baglole held shares of NVDA and MSFT.  



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