NVIDIA (NASDAQ:NVDA) got its year started with a bang. In the fiscal first quarter of 2021 (the three months ended May 2, 2021) revenue increased 84% year over year to $5.66 billion, and adjusted earnings per share were up 106%. Ahead of the quarterly update, the semiconductor designer announced a 4-for-1 stock split. While stock splits don't have a material impact on a business's valuation, investors struck an upbeat tone on the news. Shares are now up 175.8% since the start of 2020.
Stock split aside, there's reason to believe NVIDIA's run isn't over. Chip demand is sky-high right now, and the company is a leader on multiple high-growth technology fronts. Let's look at three reasons why this stock could continue its upward movement in 2021.
Image source: Getty Images.
1. New gaming GPU upgrades are just getting started
NVIDIA got its start with high-end video game graphics, and the industry remains the company's largest market. Gaming sales were $2.76 billion in Q1, up a whopping 106% year over year. The surge is driven by the RTX 30 series GPUs released late last year. These advanced chips come standard with ray tracing and AI-enhanced graphics capabilities to help players get the most out of their gaming experience.
With such a boom in video game sales, it might seem like this leading segment at NVIDIA would be headed for a slowdown. That time hasn't arrived yet. The hardware upgrade cycle is really just getting started. NVIDIA just recently announced the first batch of laptops with RTX GPUs are coming out this summer, which makes its new chips available to tens of millions more gamers worldwide. And to better address video game market demand, NVIDIA has built restrictions in the RTX 30 series to prevent these graphics processors from going to cryptocurrency mining outfits (the new CMP chips custom designed for the crypto market are out and are expected to haul in $400 million in sales next quarter).
NVIDIA said it expects revenue to be about $6.3 billion in the second quarter, up 63% from a year ago at the midpoint. While cryptocurrency chips are contributing to this torrid pace of growth, the gaming and data center markets represent the lion's share of expansion.
New laptops featuring NVIDIA RTX 30 chips are coming soon. Image source: NVIDIA.
2. Complex data centers need new tech hardware
Speaking of data centers, this has quickly emerged as NVIDIA's second-largest vertical. Sales were $2.05 billion in Q1, up a more-than-respectable 79% year over year.
Data centers operate behind the scenes but are critically important computing units in today's world. They operate the internet, mobile networks, the myriad of software services built and residing in them, and coordinate real-world activity like managing postal services and healthcare information. And in an increasingly sophisticated digital world, better hardware that is able to coordinate all this new data is needed. Lots of companies are adding GPUs to their data center designs as computing accelerators, or outright replacing older CPUs (central processing units) with faster and more energy-efficient GPUs. This is a space traditionally dominated by Intel (NASDAQ:INTC), but NVIDIA is gunning for the chip giant's haymaker. Last year, it unveiled a new data processing unit (DPU) and early in 2021 announced a CPU called Grace designed to pair with its GPUs and built from the ground up for modern data center applications like AI.
Just like its gaming business, data centers are in the early stages of getting upgraded. CFO Colette Kress said on the earnings call that "every industry is becoming a technology industry." There's no shortage of growth opportunity for NVIDIA, especially in cloud-based services and AI as companies unlock new capabilities and get more efficient in their operations using new chip tech.
3. NVIDIA is not just a hardware company anymore
NVIDIA of course makes money from the sale of its semiconductors. Licensing revenue from selling chip designs will get a big boost from the pending ARM Holdings acquisition (which Kress said is still on track to be completed by early 2022), but there's a lot more to NVIDIA's business model these days.
Cloud-based recurring software-as-a-service (SaaS) revenue is a promising front for this chip company. Its auto industry platform is a prime example. Auto revenue was flat year over year in Q1 at $154 million as NVIDIA continues to exit commoditized vehicle infotainment hardware. But its Drive autonomous vehicle platform spans not just hardware but also software services, helping automakers and autonomous vehicle researchers advance self-driving and safety capabilities.
Another example is Omniverse, a new collaborative software platform for designers and creators of all sorts. Omniverse has been in open beta but will have a commercial launch this summer for both individual users and enterprises. Kress said there have been over 17,000 downloads of the open beta so far, indicating robust demand for this SaaS-based business line in short order.
Software sales will be a longer-term development for NVIDIA, but it nevertheless represents an exciting new outlet for this tech giant that pairs well with its leadership in GPUs. Innovation is firing on all cylinders at NVIDIA right now, and shares could continue their upward momentum through the back half of 2021 as growth continues at a rapid pace.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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