Top Picks 2016: Nvidia
01/21/2016 7:00 am EST
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.