Nvidia (NASDAQ:NVDA) stock has generated impressive returns for investors so far this year.

Thanks to the tailwinds in the video gaming and data center markets, NVDA stock hit an all-time high (ATH) of $230.43 on Aug. 30.

It currently hovers slightly above $225 territory, up 74% so far this year.

Wall Street has come to expect outstanding growth from the company quarter after quarter.

Analysts concur Q2 results added even more substance to NVDA stock’s premium valuation, justifying the significant gains seen in the share price this year.

Although NVDA stock has surged more than 1,300% over the past five years, it still has tremendous upside potential moving forward.

The company offers a comprehensive solution for accelerated computing, including the hardware, software and essential systems needed for advanced graphics, scientific research and all types of artificial intelligence.

Let’s now take a look at why Nvidia stock can maintain its impressive growth rate in the coming years and why it remains a solid pick for any investor looking to add a top growth stock to their portfolio.

How NVDA Stock’s Recent Metrics Came

Nvidia crushed Wall Street’s expectations once again when it released its fiscal 2022 second-quarter results on Aug. 18. Q2 revenue soared 68% year over year (YOY) to a record $6.5 billion. The chip giant reports revenue in four main segments:

  • Gaming (revenue was a record $3.06 billion, up 85% YOY and up 11% from the previous quarter);
  • Data Center (revenue was a record $2.37 billion, up 35% YOY and up 16% from the previous quarter);
  • Professional Visualization (revenue was a record $519 million, up 156% YOY and up 40% from the previous quarter);
  • Automotive (revenue was $152 million, up 37% YOY and down 1% from the previous quarter).

Adjusted gross margin increased to 67%. Adjusted operating income more than doubled to $3.1 billion. Nvidia’s adjusted earnings per share soared 89% to $1.04.

Cash and marketable securities ended the quarter at $19.65 billion, up from $11 billion in the prior-year quarter. In addition, free cash flow stood at $2.48 billion, up from $1.35 billion a year ago.

“Enabled by the Nvidia platform, developers are creating the most impactful technologies of our time – from natural language understanding and recommender systems, to autonomous vehicles and logistic centers, to digital biology and climate science, to metaverse worlds that obey the laws of physics,” said CEO Jensen Huang on the results,

Investors have been thrilled with the results over the past two weeks, and NVDA stock is up more than 20%.

As a result of the run-up in price, forward price-to-earnings (P/E) and P/S ratios shand at 55.56x and 25.85x. In other words, the valuation is overstretched even for a growth name like Nvidia.

Across-the-Board Momentum

Nvidia’s impressive quarterly performance was primarily driven by an 85% YOY increase in the gaming revenue which came at $3.1 billion.

Due to high interest from PC gamers, demand continues to exceed supply, even after more than a year since Nvidia started selling graphics cards based on the Ampere graphics processing units (GPUs).

Yet, the upgrade cycle is poised to continue, given that 80% of Nvidia customers still use cards running on older architectures.

The growing population of video gamers also contributes to Nvidia’s soaring gaming revenue.

According to Statista, by 2023 video gamers worldwide are expected to exceed three billion.

Moreover, projections suggest that the GPU market is expected to grow at a compound annual growth rate (CAGR) of 33.6% from 2020 to 2027, exceeding $200 billion in 2027.

These figures suggest that Nvidia’s gaming business is poised to see robust growth for a long time.

Meanwhile, Nvidia’s data center business also delivered another quarter of solid growth. Revenue surged 35% over the past year. Cloud computing customers are relying on Nvidia’s data center chips.

Those chips are currently used by leading high-tech companies, including Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet’s Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Information technology market researcher Gartner estimates that the data-center infrastructure market will grow at a modest pace of 6% in 2021 and only 3.4% in 2022. However, Nvidia will likely grow at a faster rate.

According to Bank of America (NYSE:BAC) analyst Vivek Arya, Nvidia could potentially triple its data-center sales by 2025.

The chip giant’s automotive business also delivered impressive results, growing 37% year-over-year to $152 million. Analysts estimate that Nvidia has $8 billion worth of automotive designs that it could commercialize in the rest of the decade.

Looking Forward

On top of the growth expected in its current segments, management is looking at other areas that could contribute to the top line.

For instance, Nvidia is also on track to expand into the software-as-a-service (SaaS) market. Such a move would help minimize the company’s reliance on cyclical hardware sales. It would also create more recurring revenue in subscription fees.

The company recently launched Omniverse, a digital platform allowing 3D creators to collaborate in a virtual environment. Omniverse also functions as a simulation engine, allowing engineers to train artificial intelligence (AI) models for self-driving cars and robots.

Put another way, the company’s total market opportunity keeps on expanding as Nvidia’s segments continue to gain further momentum.

New opportunities in robotics, automated factories, and similar advanced applications of its products offer more reasons to buy NVDA shares. While AI could become a larger market for Nvidia, another explosive long-term opportunity for Nvidia may be the metaverse.

Nvidia’s market capitalization currently stands shy of $560 billion. All these catalysts will contribute to growth that will likely make the group $1 trillion chip giant before too long.

The Bottom Line on NVDA Stock

Wall Street agrees that Nvidia is firing on all cylinders. Broad-based strength in all segments indicates that Nvidia can sustain its high growth potential for a long time.

Management anticipates revenue to surge by roughly 44% YOY to $6.8 billion in the third quarter.

Given its tremendous growth potential, NVDA stock will likely surge higher in future months. However, it is not cheap, currently trading around ATH territory.

New investors might want to sit tight and wait for market optimism to take a breather before hitting the “buy” button. A pullback from its current peak value could suggest an entry opportunity for buy-and-hold investors.

— Tezcan Gecgil

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Source: Investor Place