Nvidia (NASDAQ:NVDA) stock had an interesting past that should lead to an even better future.
Founded in 1993, aimed to introduce 3D graphics chips to the multimedia and gaming sectors. In 1999, Nvidia pioneered the graphics processing unit (GPU), revolutionizing the computing industry.
Early investors likely didn’t anticipate Nvidia’s subsequent impact on PC gaming, esports, and streaming. However, here we are, with Nvidia remaining at the forefront of most of the growth sectors of the American economy right now (particularly the AI boom).
For two decades, Nvidia has powered major tech trends like cloud services, AI, and automation. Since its IPO at $12 in 1999, it has split its stock five times, the latest being a 4-to-1 split in July 2021. Today, one share from Nvidia’s IPO equates to 48 current NVDA shares.
Currently, NVDA stock has surged over 230% this year, reaching a record high and joining the trillion-dollar club. Amid the AI boom, its growth potential remains strong. According to Interactive Brokers’ Steve Sosnick, there might be more room to run.
Let’s dive into what could lead to yet another 20% move higher in NVDA stock and see this company shatter its previous all-time highs.
NVDA Stock in the Competitive Market
Nvidia holds a leading position in AI with its H100 chips powering ChatGPT and other tech apps. Major AI chip deals with ServiceNow and Snowflake sparked increased demand and higher guidance, surprising the market and boosting its market cap by $184 billion.
A recent stock buyback announcement added to the company’s growth narrative.
Nvidia’s H100 AI chips hold a unique position, being the primary player in AI processing currently. Despite competition growing in the future, the extent of competitive advantage erosion will shape Nvidia’s valuation.
Some experts believe that Nvidia’s leading position in this market could be sticky, with the company likely to generate roughly three-quarters (or more) of the entire AI-driven chips market over the coming decade.
Nvidia’s sound position in the public cloud bolsters its valuation because of the ecosystem it has established for AI.
Competition is inevitable because of Nvidia’s costly offerings, with Advanced Micro Devices (NASDAQ:AMD) and other companies providing the market with an assortment of high-powered chips.
However, Nvidia’s offering remains the gold standard in this space, and if the market and analysts realize (and reiterate) that’s the case, it’s a step toward another 20% move higher.
Financials Stay Strong
Nvidia’s recent earnings affirm strong AI demand, particularly in data centers, with Q3 guidance pointing to continued growth, though stock gains were volatile.
Nvidia’s Q2 earnings exceeded expectations by a significant margin, with adjusted earnings per share of $2.70 and revenue of $13.51 billion. The company’s data center segment saw a whopping 171% revenue increase, and Q3 guidance of $16 billion indicates strong ongoing growth.
Wedbush Securities analyst Dan Ives hailed Nvidia’s results and outlook as a groundbreaking moment in the tech sector. The strong Q3 guidance of $16 billion outperformed estimates and is expected to fuel a sustained tech rally.
Nvidia’s capital expenditures targets remained consistent, and the company announced a $25 billion share buyback program.
Nvidia’s valuation exceeds its current fundamentals, but its GPUs are vital for generative AI. The company’s improving margins and AI prospects suggest holding and adding during pullbacks.
Despite concerns around the Federal Reserve’s hiking cycle, Nvidia’s Q2 results and Q3 guidance warrant raising the year-end price target to $560.
What Now
Nvidia’s control over data center and gaming GPU markets, along with the growth of its high-margin software applications, has bolstered its gross margin.
The company recorded an adjusted gross margin of 71.2% in Q2, up from 66.8% in Q1 and 45.9% a year ago, and projects a further increase to 72%-73% in Q3.
Despite Nvidia’s high valuation, its thriving business warrants a bullish outlook. Investors considering Nvidia should be prepared for potential short-term fluctuations, particularly if the AI market slows down.
That said, there are clearly catalysts that could take this stock 20% higher from here.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.