Nvidia (NASDAQ: NVDA) designs high-end semiconductor chips for use in powerful computers and consoles. It’s almost guaranteed that gamers and Bitcoin miners will know about the company. But it often gets overlooked, I find, from discussion on US Big Tech. For example, in the FAANG stocks, Netflix takes the ‘N’, not Nvidia.
Well, after last week’s rally, Nvidia is now the seventh most valuable company in the US, overtaking Warren Buffett’s Berkshire Hathaway. It’s also now way over double the size of Netflix.
Here’s why I’m considering buying more shares of Nvidia for my portfolio.
Why the shares have outperformed
The shares popped last week after positive commentary from Wells Fargo. The analyst has also since upgraded the target price to $370. There could be further room to run, then, after the shares closed yesterday just over $306.
The shares have also been helped recently by Meta’s (previously Facebook’s) plans to invest heavily in the metaverse. Analysts expect this to create a huge boost in demand for Nvidia’s top-of-the-range graphics chips. Meta confirmed it will be investing billions of dollars in its metaverse development, including AR/VR, and this is where Nvidia excels.
Another catalyst for Nvidia has been the excitement over Bitcoin, particularly this year. Nvidia’s graphics chips are used in the mining process of Bitcoin, and the more powerful the graphics chip, the better.
Looking ahead, it will be presenting at the GPU Technology Conference this week. The company is expected to announce the opening of its Omniverse Enterprise platform that is “built for virtual collaboration”. This could be another catalyst to come, and why I’m considering adding to my position.
Encapsulating all of this potential is a forecast for earnings to grow 135% this year. This is stellar growth in Nvidia’s bottom line, so no wonder the shares have exploded.
Valuation risk
The risk with Nvidia is its valuation. Investors have to pay top dollar to gain exposure to this advanced graphics chip designer. On a forward price-to-earnings basis, the shares are trading on a multiple of 75! This isn’t a company for a deep-value investor!
A further risk for the business is its ongoing attempt to acquire Arm from Japanese investment company SoftBank. Arm is a British CPU chip design company that used to be a constituent of the FTSE 100 before SoftBank acquired it. Regulators around the world are investigating the potential Nvidia/Arm acquisition in case it stifles competition. If Nvidia is able to bring Arm’s CPU technology in-house, then there’s huge potential for even better chips. But it’s a risk if the acquisition doesn’t go through.
The bottom line
Taking everything into account, I’m happy to keep holding shares of Nvidia in my portfolio. The company has strong growth potential from here and into the distant future, in my view. I’ll be looking to buy if the stock dips on general market weakness.
Dan Appleby owns shares of Nvidia. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
