NVIDIA Stock: How Risky Is It? – Motley Fool

 In Business

NVIDIA (NASDAQ:NVDA) stock has gone ballistic. It’s returned 634% over the two-year period through June 16, versus the S&P 500’s 22% return. 

Investors have poured money into the graphics-chip maker’s stock on account of its recent strong financial performance, and they hope the financial good times will continue. But the soaring stock price and ballooning valuation beg the question: How risky is NVIDIA stock now?

NVDA Total Return Price Chart

Data by YCharts.

Let’s explore the three types of risk all companies face: internal, external, and financial.

Internal Risks

Internal risks relate to things within a company’s control, such as setting a strategy, executing on that strategy, and successfully innovating. Internal risks largely stem from not having the right top management team.

This risk is well controlled, as NVIDIA has a strong CEO: Jen-Hsun Huang is a co-founder of the company and knows it intimately; has a hefty financial stake in the company; and gets top ratings on Glassdoor. Huang is 54 years old, so investors can probably count on him leading the company for a while longer. 

Concept for risk assessment -- a slot on puzzle board with for

Image source: Getty Images.

External risks

External risks are those risks that are outside of a company’s control, and include such things as increased competition and changing demand for its products and/or services due to factors beyond its control. NVIDIA’s two main external risks, in my opinion, are:

  1. Increased competition from Advanced Micro Devices (AMD) within gaming, its largest market platform, which accounted for 58.8% of its revenue in fiscal 2017;
  2. Other technological approaches to artificial intelligence (AI) becoming more favored than its graphics processing unit-based deep-learning approach to AI. Potential competitors are numerous, and include Alphabet’s Google and Apple.

NVIDIA is currently sitting pretty in the high-end PC gaming market, commanding 72.5% market share in discrete GPUs for desktops compared with AMD’s 27.5% share in the first quarter of 2017, according to Jon Peddie Research. The launch of its Pascal GPU architecture last May has been powering its gaming results, as gamers have been enthusiastically upgrading their graphics cards.

In late July, AMD is slated to launch its graphics card for consumers based on its much-touted new Vega architecture. Only time will tell how successful it will be in its attempt to take share from NVIDIA. In my view, winners often keep winning, so it seems more likely than not that NVIDIA will be able to maintain its dominance over AMD.

Illustration of circuit board in human brain form.

Image source: Getty Images.

There are too many potential competitors in NVIDIA’s rapidly growing, artificial intelligence-driven businesses — data center and self-driving vehicle technology within its auto platform — to explore here. AI is in the early innings, with numerous companies wanting a piece of the action. Some companies investors should keep an eye on are Google, Apple, and Intel, which is buying driverless vehicle tech company Mobileye. Last month, Google announced the second generation of its Tensor Processing Unit (TPU) chip, designed to run its deep-learning algorithms. In addition to Google using these chips for internal purposes, they’ll be available for others to use via Google Cloud, just as NVIDIA’s GPUs are. And last week, Apple CEO Tim Cook finally confirmed that the tech giant is working on driverless car technology, calling it the “mother of all AI projects.”

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