NVIDIA (NVDA -0.02%), the graphics-chip maker and leader in the burgeoning virtual-reality and driverless-car markets, has been on an absolute tear over the past 12 months, with shares up some 340%. Naturally, when a stock moves like that, it's inevitable for investors to wonder if it's too late to buy a few shares. However, this is precisely when investors should be at their most cautious. This very well could be just the start of NVIDIA's path to world domination, or it could just as likely be the very top of a bubble-like valuation.
While the truth probably lies somewhere in the middle, there are certain types of investors who should, and shouldn't, invest in NVIDIA no matter what the reality is. So with this fundamental truth in mind, we asked two of The Motley Fool's best and brightest just who should (and shouldn't) invest in NVIDIA. Here's what they had to say.
Image source: Getty Images.
You firmly believe in the growth story
Chris Neiger: NVIDIA has caught the eye of many tech investors with its stock price run-up of 229% in 2016. The investor optimism is more than just speculation, though. NVIDIA is already a dominant force in the GPU market, with more than 70% of the discrete desktop GPU market share, and it shows no signs of ceding its lead to rival AMD. That's important, because the company brings in about 62% of its total revenue from its gaming GPU segment.
If that were the only thing going for NVIDIA, it would probably be enough. But one of the reasons this company is so exciting is that it's taking what it knows about GPUs and applying it to all-new growth markets -- namely, semi-autonomous driving and high-powered, artificially intelligent supercomputers. The company's DGX-1 computer uses deep learning and artificial-intelligence analytics to generate as much processing power as 250 conventional servers. Data-center revenue is NVIDIA's second-largest business segment, and the company is proving it can innovate like no other in the space.
In the semi-autonomous-driving market, NVIDIA's Drive PX 2 supercomputer is being used as the onboard computer for many self-driving vehicles. The computer uses NVIDIA's GPUs to processes visual information in real time and give cars a type of situational awareness. Eighty automakers and Tier 1 automotive suppliers are already using NVIDIA's Drive PX system, and Tesla just became one of NVIDA's most recent customers. Some investors may be scared away by the company's above-average P/E ratio of 74, but NVIDIA should continue to be a long-term growth story as long as the company continues growing gaming revenue at a healthy clip and its investments in AI and semi-autonomous driving continue to pay off.
Because everyone else is
Sean O'Reilly: Let's get one thing out of the way: NVIDIA has had a heck of a run-up, and even though shares rose last year by over 340%, there's still a strong bull case to be made today. NVIDIA remains the undisputed king of advanced graphics chips. What's more, thanks to its NVIDIA Drive PX 2 computing platform, it has a respectable stake in the future of not only driverless cars but artificial intelligence as well. Given these catalysts, it's shouldn't have been surprising that NVIDIA was one of the best performing stocks of 2017. Yet that awe-inspiring performance is precisely where the danger in investing in the company now lies.
To invest in any company, not just NVIDIA, you need to believe in that company and do your due diligence. You need to read conference calls, have faith in management's vision for the future, and find the current valuation compelling, because at some point, your faith in the company will be tested. It's not unheard of for a stock that's rewarded shareholders with huge gains in a short period to fall, 10%, 20%, or even 30%, only to then rocket ever higher -- leaving out in the cold those who sold during the pullback.
So don't just buy into NVIDIA because it's the current hot stock. You will be tested, and the last thing you want to do with a great business like NVIDIA is to sell out when Mr. Market throws a fit.
