Why the Analysts Are Right to Be Bullish on Nvidia

Nvidia (NASDAQ:NVDA) reports earnings on August 19. And NVDA stock is climbing on news that analysts have increased their price targets for the stock. The analyst firm, Susquehanna increased its price target from $450 to $540. Oppenheimer gives the stock a lower price target of $500, but it gave the stock a larger jump (its previous target was $400).

2020 is already the year of the semiconductor. These traditionally “boring” stocks are among the most profitable for investors. Nvidia stock, for example, is up over 100% for the year. And that includes a 7% run-up since the closing bell on August 14.

But Nvidia is not alone. Advanced Micro Devices (NASDAQ:AMD) is also up having a big year. Its stock is up 66%. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up over 17% in 2020. That far outpaces the S&P 500.

So what’s all the buzz about semiconductors?

There’s no question the sector is getting a boost from 5G. 2019 was supposed to be the year 5G became a reality. But the build-out of the 5G infrastructure stalled due to the trade dispute with China. Then when things were finally coming around, the novel coronavirus put a pause on things.

However, a silver lining in the pandemic is that it has forced companies to invest in remote working technology. Several companies, most notably Alphabet (NASDAQ:GOOGL), are saying employees will be working remotely at least until spring of 2021. This is giving 5G another catalyst, and it’s giving investors another reason to look at semiconductor stocks.

Nvidia’s two largest drivers are taking it higher

However, as big of a story as 5G is, it isn’t the main reason for the 2020 performance of NVDA stock. For that, you can thank the company’s strength in gaming and data centers. Right now these two segments are competing on the company’s balance sheet to see which one will be the reason for Nvidia stock to climb higher.

On the gaming front, we have to look once again at the ripple effects of the Covid-19 pandemic. As more Americans were sheltered in place, they turned to video games for entertainment. That created strong demand for gaming consoles. And that created a surge in demand for Intel’s graphic processing units (GPUs).

But gaming consoles were not the only reason that Nvidia did so well in this segment. The company also owns GeForce, one of the world’s largest gaming platforms. Millions of players on the site create an opportunity for Nvidia to capture new customers for its products.

And Nvidia is not resting on its laurels. The company has a new gaming chip set to debut on August 21. This will be timely since Advanced Micro Devices is expecting to get a boost from the new gaming consoles being released by Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) respectively.

The other segment that is powering NVDA stock is data centers. And this is where the company’s $6.9 billion investment in Mellanox is paying off. Nvidia needed to have a presence in the data center market. Although investors were initially skeptical, the deal is turning out to be the right move.

Data centers are growing because of two principles. Moore’s Law describes the growth and capacity of integrated circuits. Simply put, the more data companies collect, the more processing power they need. The second is Bell’s Law. This law states that every ten years, a hundredfold drop in the price of processing power brings about a new computer architecture.

This means that cloud computing companies like Alphabet and Amazon (NASDAQ:AMZN) need more data centers to house the big data. And they’re not alone. In the United States, data centers are big business.

The U.S. data center market is projected to grow at a compound annual growth rate (CAGR) of 1% through 2025. This has caught the attention of state governments. Over 25 states are offering tax incentives for companies to build new data centers.

All signs point to Nvidia being a buy

Due to the strength of its gaming and data center businesses, Nvidia looks to be a strong buy for the rest of 2020. This is unquestionably a very competitive sector. But, at this time, there looks to be more than enough opportunities for every company to grow.

A more pressing concern for investors may be its valuation. The recent run-up has NVDA stock trading at 46x 2021 earnings. And that may be a little pricey for investors not used to seeing valuations like that for a chip stock. But right now that’s the price of entry in this red-hot sector.

Semiconductor stocks won’t always be this attractive. But investing is about taking advantage of the opportunities that exist. Nvidia is a gift horse that investors should not take for granted.