Top Picks 2016: Nvidia

01/21/2016 7:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

While the chip industry is notoriously difficult to invest in, every year there are usually one or two stocks that light up the charts due to a unique product in a fast-growing industry or two, explains growth stock expert Michael Cintolo, editor of Cabot Growth Investor

For 2016, my Top Pick for more speculative investors is Nvidia (NVDA), the hands-down leader in graphics chips; and those chips are finding their way into more and more next-generation products.

The entire gaming device industry is in the early innings of a major upgrade cycle (most gamers are using devices that have less power than the games should have); gaming-related revenues were more than half of the total in the third quarter and were up 44% from a year ago. 

Another big driver in the future is the automotive business, as higher-quality infotainment systems and semi- and (eventually) fully-autonomous driving require more powerful chips that Nvidia provides. 

In the third quarter, auto-related revenues made up just 5% of business but were up 52% and have the potential to explode in the years ahead. 

Throw in some exposure to the data center boom and it’s likely Nvidia’s position in newer, rapid-growth industries will cause growth to accelerate in the quarters ahead. 

Lastly, cash flow is improving, valuation is reasonable, and management is set to return $1 billion through share buybacks and dividends (1.4% annual yield), a lot compared to the current market cap of around $17.5 billion. The story has lots of potential.

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