Is it too late to buy Nvidia shares?

Nvidia (NASDAQ: NVDA) released another earnings report last week, with revenue and earnings per share up 68% and 276%, respectively. The stock has hit a new high and is back to 70% in the past year.

Analysts expect Nvidia to increase earnings per share at a compound annual rate of 30% over the next five years. If Nvidia meets these expectations, the title could still generate big gains from these levels. Here are three reasons why it’s not too late to buy Nvidia shares.

1. Improve gross margin

In the fiscal second quarter, non-GAAP gross margin improved 70 basis points year-on-year to 66.7%. Management has assigned higher average selling prices for desktop GeForce gaming graphics processing units (GPUs). This trend is partly responsible for fueling Nvidia’s gross margin over the past five years.

NVDA gross profit data by YCharts

An expanding margin indicates that Nvidia’s competitive gap is widening. Nvidia is the leader in the discrete expansion card GPU market. Latest report from Jon Peddie Research shows Nvidia expansion card market share to be 80% in Q1 2021, down slightly from 83% in the previous quarter, but up from 69% % in the first quarter of 2020. This despite the efforts of a competitor Advanced micro-systems and its CEO, Lisa Su, to be more competitive in the market.

Nvidia is also a leading supplier of graphics chips for self-driving cars and data centers. It has racked up over $ 8 billion in automotive design earnings now that some of the world’s leading automakers are using the Nvidia Drive platform to work on autonomous technology.

Additionally, the data center continues to look like a huge market for the company, with segment revenue up 35% year-over-year in the last quarter, adding to the growth at three digits for the quarter of the previous year.

Growth in the data center segment has been the primary driver of Nvidia’s gross margin improvement in recent years, but with the data center alone representing a potential $ 100 billion market opportunity, the Nvidia’s margin expansion story is not over. Data center revenue over the past 12 months was only $ 8.2 billion. The long-term rise here bodes well for future earnings growth, which could justify a rise in the share price.

2. Software opportunity

Nvidia has increased its capital spending more than eightfold to $ 1.2 billion in the past five years. One of the results of this increased investment is the recent unveiling of new software as a service platforms, such as Nvidia AI Enterprise and Nvidia Omniverse.

The AI ​​Enterprise platform will be offered through a perpetual or annual license. It combines cutting-edge software tools to help IT professionals bring AI solutions to market in a much shorter time frame. It is currently in Early Access and will be available soon.

Nvidia Omniverse will be available later this year on subscription. It is a simulation and collaboration platform for graphic designers who work on 3D content, such as shared virtual worlds which has resulted in increased user engagement at Roblox. Omniverse essentially opens the door for Nvidia to take advantage of the growing popularity of the Metaverse that Roblox has helped bring to the mainstream.

How big is Nvidia’s software opportunity? On the recent earnings conference call, CEO Jensen Huang said this “could represent billions of dollars in business opportunities for us.” More importantly, as software revenue grows, it should improve margins and generate a recurring revenue stream that can offset fluctuations in demand for hardware chips.

Investors tend to reward companies with long growth leads and recurring income streams with higher valuations, so these opportunities could justify Nvidia’s expensive price-to-earnings ratio of 52 based on earnings projections. of this year.

3. Fastest game leveling cycle in Nvidia history

Despite persistent supply shortages, gaming revenue jumped 85% year-over-year in the last quarter. Over 80% of Ampere-based GeForce gaming GPU shipments came from low hash rate chips. These were released earlier this year to discourage cryptocurrency miners from buying chips for PC gamers. Overall, the numbers show that Nvidia is experiencing very high demand from PC gamers.

A sharp drop in cryptocurrency prices in late 2018 caused a slump in gaming revenue, but Nvidia is currently experiencing its fastest ramp in history with the new Ampere gaming graphics cards, and it’s only just beginning in this. upgrade cycle. Management estimates that 80% of the GeForce user base has yet to upgrade to an RTX GPU.

Additionally, the number of PC gamers is estimated to have grown by 20% over the past year. So, Nvidia not only has millions of GeForce users who have not yet upgraded, but there are new players in the market that could indicate greater growth in the gaming segment, which remains the biggest source. revenue from Nvidia.

Nvidia remains a good investment

Management is asking for an increase in revenues of approximately 44% year-over-year over the next quarter. Nvidia serves large markets that could keep the company growing for a long time. New opportunities in robotics, automated factories and other advanced applications of its products are other good reasons to consider buying stocks. So, to put it simply, no, it’s definitely not too late to buy Nvidia shares.