3 Reasons Nvidia Stock Could Surge to $400 in 2022

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After skyrocketing 126% in 2021, Nvidia’s (NASDAQ:NVDA) market value currently stands at a staggering $665 billion. Yet by providing the technology that powers enormous markets like digital entertainment and cloud computing, the chipmaker is poised for even more gains in the year ahead.

Here are three powerful growth drivers that could propel Nvidia’s stock price to greater heights in 2022.

1. Gamers galore

Across the world, an estimated 3 billion people play video games. The global gaming industry, in turn, will generate nearly $220 billion in annual sales by 2024, up from $180 billion in 2021, according to analytics company Newzoo.

Nvidia has become a leading technology supplier to this massive and steadily expanding market. Its graphics processing units, or GPUs, are in high demand among gamers seeking top-tier performance and power efficiency.

Nvidia is also building out its own cloud gaming service called GeForce Now. Members can stream over 1,000 games onto their desktops and mobile devices. Gamers can play up to one hour per session for free, while premium plans ranging from $49.99 to $99.99 per six months provide longer sessions and access to higher-performance servers.

Nvidia’s deal with digital entertainment giant Electronic Arts has brought popular game franchises like Battlefield to GeForce Now. Nvidia has also struck partnerships with the likes of Samsung and AT&T to bring its cloud gaming service to their TV and 5G customers, respectively. Thanks in part to these partnerships with game and device makers, GeForce Now’s members base has grown to more than 15 million subscribers.

With the game market set to grow even larger, investors can expect Nvidia to sell many more GPUs and cloud gaming subscriptions in the coming years.

2. Torrid data center growth

Incredibly, Nvidia’s data center business is expanding at an even faster clip than its gaming operations. While the tech titan’s gaming revenue jumped 42% to $3.22 billion in its fiscal 2022 third quarter, its data center sales surged an even more impressive 55%, to $2.9 billion.

Nvidia is a major beneficiary of the growth of cloud computing, as well as the rising adoption of advanced technologies such as artificial intelligence (AI). The semiconductor leader’s chips are helping its customers make the most of their cloud data, with GPU-accelerated functions like analytics, forecasting, machine learning, and natural language processing.

Demand, in turn, is booming. That’s likely to remain the case for the foreseeable future, as the world shifts more of its data and computing processes to the cloud.

3. The metaverse awaits

Nvidia has a third exciting growth opportunity in the metaverse, a budding network of 3D worlds that some investors believe represents the next evolution of the internet. CEO Jensen Huang wants to help businesses build virtual simulations and robotic applications for a wide array of tasks. To do so, Huang has placed Nvidia’s Omniverse platform at the heart of its metaverse initiatives.

To rapidly gain traction among the 45 million professional creators around the world, Nvidia is making its real-time 3D design and simulation tools available for free to artists and designers. Nearly 100,000 creators have already downloaded its Omniverse applications since the platform’s beta launch last year.

But this is far from simply a charitable endeavor. Nvidia plans to eventually charge an annual licensing fee of up to $1,000 per user. With demand for these tools expected to soar in the coming decade, some analysts predict that the addressable market for Nvidia’s Omniverse platform could eventually exceed $100 billion per year.

Many ways to win

With its leading positions in gaming, data centers, and the metaverse, Nvidia’s business appears set to expand at an impressive rate for many years to come. Investors who buy shares today should earn handsome returns, as the tech juggernaut’s stock price rises along with its sales and profits.

Nvidia Stock: Quantitatively Speaking Still Overvalued (NASDAQ:NVDA)

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Intro

This is my first article about NVIDIA (NASDAQ:NVDA). I readily admit that I do not fully understand the specifics of the company and what investors see hidden in it. Therefore, at this stage, I offer a comprehensive, quantitative analysis of the company’s fundamental value.

Price vs. Results

The easiest way to get a first idea of the adequacy of the company’s current price is to look at the dynamics of its capitalization in the context of the dynamics of key results. As a rule, this allows you to identify persistent regressions.

Based on the long-term relationship between the revenue TTM absolute size and the company’s capitalization, NVIDIA’s current price is somewhat overvalued:

VisualizedAnalytics

The same is true for the relationship based on the EPS TTM absolute size:

VisualizedAnalytics

On the other side, over the past seven years, NVIDIA has shown a direct relationship between the rate of revenue growth and its P/S multiple. It should be noted that there is no similar qualitative relationship between EPS and earnings growth rate. In my opinion, this means that the rate of revenue growth is now a key driver of capitalization.

VisualizedAnalytics

In the context of the last model, the company is now also overvalued. But more importantly, the expectation of a decrease in the revenue growth rate indicates a potential decrease in the P/S multiple in the coming quarters.

So, having determined that revenue is a key driver of company capitalization, we can build a general model that determines the company’s balanced price:

VisualizedAnalytics VisualizedAnalytics

Under this approach, NVIDIA’s modeled capitalization is lower than the actual one within about two standard deviations. And the nearest forecast also does not justify the current price of the company.

Comparative Valuation

Using elements of machine learning, I analyzed many options for comparative assessment of NVIDIA through multiples. As a result, I found only three models that allow a more or less reasonable judgment of the relative value of the company. To my surprise, all of these models are based on growth-adjusted multiples. This suggests that growth is a determining factor in the level of NVIDIA multiples.

A comparative valuation of NVIDIA through the forward P/E (next FY) to growth multiple indicates that the company is undervalued by 18%. But the quality of this model is not high enough:

VisualizedAnalytics VisualizedAnalytics

Considering the EV/Revenue to growth multiple, NVIDIA seems expensive:

VisualizedAnalytics VisualizedAnalytics

The same is true for the EV/EBITDA multiple:

VisualizedAnalytics VisualizedAnalytics

Judging by the proposed multiples, I cannot make an unambiguous conclusion. The only thing that can be stated is that the company’s growth rate is a determining factor in the level of NVIDIA multiples. The slowdown should significantly reduce the level of its multiples.

Discounted Cash Flow Model

When predicting NVIDIA’s revenue for the next ten years, I proceeded from the average expectations of analysts. According to consensus forecasts, in the next decade, the company’s annual revenue will exceed $160 billion.

NVIDIA’s operating margin has reached 35% in the last quarter. This is close to the historical maximum of the company. But the model is based on the assumption that the operating margin over the next 10 years will gradually decline to 30% in the terminal year. This is a standard approach based on the likely increase in competition.

Data by YCharts

Here is the calculation of the Weighted Average Cost of Capital:

VisualizedAnalytics

Some explanations:

In order to calculate the market rate of return, I used values of equity risk premium (4.24%) and the current yield of UST10 as a risk-free rate (1.7%).

I used the current value of the three-year beta coefficient. For a terminal year, I used Beta equal to 1.

To calculate the Cost of Debt, I used the interest expense for 2021 divided by the average debt in 2019 and 2020.

Here’s the model itself:

VisualizedAnalytics

(in high resolution)

The DCF-based target price of NVIDIA’s shares is $233, offering 12% downside. At the same time, in my opinion, I considered a relatively positive scenario for the future development of the company.

Free Cash Flow Yield

Looking at NVIDIA in the context of free cash flow, I want to draw your attention to one important indicator - the free cash flow yield. It shows how much the company generates free cash flow per dollar of its market price.

Free Cash Flow Yield = Free Cash Flow TTM / Market Capitalization

I compared this figure of NVIDIA with other technology companies and closest competitors. Alas, the company’s figure is the lowest:

Data by YCharts

The free cash flow that NVIDIA generates for every dollar of its capitalization is about 1%. This is lower than the US 10-year treasury yield. I don’t even compare with inflation. In general, this is a wake-up call for an investor.

Technical Picture

From October to November last year, NVIDIA’s share price rose nearly 80%. During this period, two gaps were recorded. These gaps have defined strong support levels. And the first of these levels seems to have already been broken. In my opinion, before the level of the second support is reached, it is premature to talk about the completion of the correction.

TradingView

Bottom line

I do not share the optimism of those who believe that NVIDIA is an extremely attractive investment at its current price. I won’t jump to conclusions about the company’s long-term potential just yet, but it’s highly likely that the decline will continue in the short term.

Why Nvidia Stock Blipped Higher Today

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What happened

Semiconductor stock Nvidia (NASDAQ:NVDA), a powerhouse in the graphics processing units used to power video games, is enjoying a modest bump in early trading on the Nasdaq Stock Market this morning. As of 10:18 a.m. ET, Nvidia shares are up 2.1%.

You can probably thank Apple (NASDAQ:AAPL) for that. And Fortnite.

So what

You’ve heard about the legal rumble that erupted between Apple and Fortnite maker Epic Games in 2020, right? How the former enjoyed charging the latter 30% of revenue every time a gamer made an in-game purchase using an iPhone – but the latter didn’t enjoy this nearly so much?

When Epic rebelled against this payments system, and introduced a method permitting gamers to pay it directly for in-game purchases (cutting Apple out of the loop), Apple retaliated by banning new Fortnite downloads from its App Store, setting the stage for an “epic” lawsuit against Apple. Ever since, it’s been impossible to download Fortnite on an iPhone or iPad – but thanks to Nvidia, you may not need to anymore.

As Gizmodo reported yesterday afternoon, Epic and Nvidia have teamed up to exploit a loophole to Apple’s Fortnite app ban. By subscribing to Nvidia’s GeForce Now service on Safari, gamers will soon be able to use Apple’s Safari browser on their iPhones to play Fortnite via Nvidia’s service. In this way, says Gizmodo, GeForce Now subscribers should have “full functionality” playing Fortnite on an iPhone or iPad. Indeed, Gizmodo notes that GeForce Now is “specifically optimized for mobile devices.”

Now what

At last report, GeForce Now boasted 12 million subscribers – and was growing 33% annually. Nvidia’s opportunistic alliance with Epic to get around Apple’s Fortnite ban promises to boost that subscriber number even more. As Techacake.com confirms, “Fortnite is [still] the most popular battle royale game in 2022,” with as many as “4 million concurrent players every day,” and “more than 80.4 million Fortnite monthly active users.”

Granted, not all these users will now immediately begin playing Fortnite on Apple devices. (In fact, GeForce Now’s Fortnite service is actually only in beta right now, with a waitlist to sign up.)

Granted, too, most GeForce Now subscribers who do sign up won’t be paying subscribers, having signed up for the free version of the service instead. Still, investors can probably safely assume that Nvidia will add at least some new subscribers from this move – subscribers it wouldn’t have gotten but for the Apple-Epic legal kerfuffle. That’s an incremental positive for Nvidia stock, and a decent justification for today’s modest rise in stock price.

Nvidia Stock: Buy More To Boost The Core Position (NASDAQ:NVDA)

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hamzaturkkol/E+ via Getty Images

Nvidia Corporation (NVDA) is one of several semiconductor stocks we have recommended to our members as we believe that the overall sector is one that is moving away from being highly cyclical into one that will enjoy ongoing demand. This is because the demand for chips is not going to slow, in our opinion. They’re in everything it seems these days. Looking at our investment in the name, the stock has truly been a winner. A few months ago when the stock was at $320 we recommended taking some of the gains off the table. We’re traders, but that does not mean we do not invest. In fact, when we have trades that result in 50% or more, we often will take out our initial investment plus some profit, and let the rest run with the house’s money forever. This is a solid strategy. That being said, we added to our position today in an effort to trade around the core position. While executing this is often more work than the average investor can bear, it’s a way to increase profits. With that said, the price correction of about 15% is attractive for entry here. If you are new to the stock, here is how we would enter it.

The play

Target entry 1: $265-$267 (20% of position)

Target entry 2: $260-$261 (30% of position)

Target entry 3: $238-$240 (50% of position)

Target exit on a trade: $310

3-year price target: $500

No stop loss is recommended at this time

Options considerations: With high dollar stocks, consider deep in the money call options, such as a January 2023 $200 strike. For nearer-term leverage and faster potential returns look to the Jun $285 call strike.

Discussion

Make no mistake, the company is firing on all cylinders, and the sector’s demand has never been stronger. We see the sector as outperforming the broader market this year. That said, the stock’s valuation, even after the 15% decline is a bit stretched in the near term, but we’re more than confident that the stock will grow into this valuation. Let us first start there.

The stock’s valuation receives a Quant rating of an F from Seeking Alpha:

NVDA Valuation metrics Seeking Alpha

This is no surprise as this is a growth name. But it’s expensive on nearly every metric except one. The PEG ratio, and that’s because there’s true growth here. That takes us over to the same ratings for growth:

NVDA growth metrics Seeking Alpha

Oh, look, A-rated growth. That’s top-notch. So when someone tells you this stock is expensive, simply agree. It is, compared to many other everyday stocks. But when you’re factoring in the recent decline in valuation, along with what we think is increasing odds for earnings’ revisions higher, the growth metrics balance out the valuation. Just look at that revenue and EBITDA growth. Pretty solid.

There’s a lot of anxiety over the Arm Holdings deal for $40 billion. That has been covered extensively, so we will not discuss it here, but we see it complementing the company quite nicely. It can and will impact the future outlook, but some of the most attractive features of the stock cannot be reflected in metrics with or without Arm. What we are talking about here is the potential impact of Nvidia’s tech in the medium to long term. Obviously, their graphics cards are exceptional. There’s huge demand for them in higher-end computers. Chips have been called the “new oil” but that’s not the true commodity of concern.

Where your average trader does not understand or appreciate the company longer term is the dominance that this name has in data. Data is a commodity, in our opinion. Strike that. It is the commodity. Machine learning, decisive marketing, targeted advertisement, this is just the surface of what data can help with. Nvidia has at its fingertips access to a vast amount of data through its traditional computing hardware business, but also in its gaming platforms such as GeForce Now (which just provided a workaround for Fortnite and Apple (AAPL) iOS by the way), CUDA parallel computing platform, and its many software platforms including the game-changing Omniverse. All of this feeds the potential for expansion of its already impressive artificial intelligence work. For more on this topic see this informative piece.

The stock has garnered a lot of attention from traders, investors, and meme stock chasers alike. Fundamentally, even with Nvidia’s chips being used in technologies that are in our everyday lives, and the demand has never been higher. One place where chips are in demand is in the automotive industry. All new cars use them in some fashion. But the smarter the car, the better the chips that are needed. This is another growth opportunity we see for NVDA and why we think after a 55-60 point pullback it is time to add for the medium term. The demand in autos circles back to the Omniverse. You see, this is much more than a graphics card business. It sounds silly to say it, or, to read it, but there are many investors who simply do not realize it. Specifically, with cars, the company has its NVIDIA DRIVE products which are for use in self-driving vehicles. This series of products isn’t just a chip, is the entire computing system in the vehicle. Keep in mind these products also collect mountains of data from sensors. This is mostly of course to ensure better operation of the vehicles. For more on the opportunity in cars, see this solid piece.

We will come right out and say it. Management here is the best in the business, and there are some great management teams that we have spoken with over the years. But Jensen Huang’s leadership is outstanding. He took the company from one that was trying to expand outside of its traditional boundaries into a company that is a leader in multiple fields, using data as its commodity. Now, one of the bearish arguments to the growth story is that revenues are going to slow some. This is true, but the opportunity that lies ahead with the Omniverse cannot be understated. The Omniverse engine is the technology infrastructure that produces and uses the commodity of data to make the world a better place. In fact, we will go farther and say it is a world in itself being created. The data will of course feed back to the artificial intelligence growth we alluded to. Eventually, the Omniverse engine can be a place where companies go to create and design new and exciting virtual worlds. You cannot even estimate the total addressable market. It may approach infinity if you really go down the rabbit hole on this. Worlds within worlds, all using the phenomenal technology infrastructure and data that Nvidia has at its fingertips. It is not science fiction either, it is happening as we type. Worlds that do not exist yet will be built.

So is the stock a buy? We think it’s still expensive, but new money coming in is getting a piece of the long-term plan of this company. It’s a chip play, but it is rapidly becoming so much more than that. Their competencies are broadening each year. This is becoming a juggernaut that just happens to make chips too.

So where do we see growth continuing? We believe based on the current state of affairs that revenue growth is going to slow some and that the market is digesting that. We’re ballparking a 25-35% CAGR over the next three years. This may be conservative even, but would still make for a very attractive entry point. We see growth driven primarily by investments in data center expansion. We see the company building out and having its customers move ever-increasing portions of their workloads to the cloud and to its artificial intelligence platforms. Keep in mind the data. The company will analyze the absurd levels of data that will be generated further fueling growth and self-learning. We believe that demand in gaming will take a slight dip as the latest gaming systems become more mainstream and saturated, while PC demand should remain stable. Omniverse, as well as the smart vehicles, enhanced robotics, and software-as-a-service as a whole should grow sharply in this time offsetting other slowdowns in the next few years.

Take home

We took some profit off the table in November and have begun redeploying into the core investment. Trading around a core position is difficult and not for everyone, but when executed properly magnifies gains. That said, we see NVDA not just as a short-term opportunity, but one that can build generational wealth as their technology expands into new markets, some of which are so big and broad they cannot be defined or have not even been created yet. No one (or probably very few people) is talking about how wild it is that there are markets that cannot be quantified because they have not been created yet.

Nvidia Stock Is an Investment in the Multi-Trillion Dollar Metaverse

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Nvidia Stock Is an Investment in the Multi-Trillion Dollar Metaverse