American chipmaker Nvidia (NASDAQ:NVDA) has seen its value surge over the past several months. After a 1.96% percent gain on Wednesday, Nvidia stock is now up about 35% since the start of June and 37% in 2019.
NVDA got a big boost on Monday, when several prominent Wall Street analysts substantially raised their 12-month price targets on Nvidia stock. With bullish analysts suggesting that NVDA can climb 20%, is it time to invest in NVDA stock?
If everything goes perfectly for Nvidia, the case could certainly be made that it’s a buy. However, there are a number of factors that could cool Nvidia’s growth, with China looming large on that list.
The Case for Buying Nvidia Stock
NVDA is definitely an attractive stock at the moment. Even though, as mentioned, it’s up 37% in 2019, it’s still 33% below the level it hit in September 2018.
RBC Capital raised its price target on Nvidia stock to $217 on Monday, triggering a rally by Nvidia stock. RBC is not the only firm that’s upbeat on NVDA stock. The Wall Street Journal is tracking 37 analysts, and of those, 24 rate NVDA as a “buy.”
Among the reasons for RBC’s upgrade is Nvidia’s pending purchase of Mellanox Technologies (NASDAQ:MLNX). The $6.9 billion dollar deal will give NVDA’s data-center business a big boost. With the Mellanox deal, Nvidia is positioning itself to be a much bigger player in the explosive world data center market. In 2018 alone, companies like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) spent $152 billion on hardware and software for data centers. RBC thinks that spending could raise Nvidia’s data-center revenue by 100% in the near-term, with sustained growth in the high-double-digit-percentage range.
The growth of Nvidia’s video-game business and its automotive division are also seen as likely to boost NVDA stock. The revenue of the automotive division — which supplies chips for autonomous driving systems — reached a record $209 million last quarter.
Factors That Could Derail the Recovery of NVDA
While there are clearly plenty of reasons to be optimistic about Nvidia stock, there are also factors that could stunt NVDA’s growth.
While the increase of automotive revenue is good news, graphics cards for gaming still generate half of NVDA’s sales. Last quarter, the unit’s revenue sank 27% year-over-year to $1.3 billion. That’s the result of a lasting “crypto hangover” from the crash of the cryptocurrency market. But the gaming division faces a tough adversary in rival Advanced Micro Devices (NASDAQ:AMD). AMD is aggressively attacking Nvidia in the gaming market and gaining market share in the space.
AMD just announced yet another new graphics card that it claims outperforms Nvidia’s equivalent card by a wide margin. And when next year’s new generation of gaming consoles is released, AMD will be powering the Playstation 5 and the Xbox Scarlett.
China remains a huge variable. It’s estimated that 44% of Nvidia’s revenue comes from the Chinese market. That makes Nvidia stock vulnerable to any escalation in the ongoing trade war between the U.S. and China.
And speaking of China, that could be a problem when it comes to Mellanox as well. As InvestorPlace’s Vince Martin pointed out, Mellanox is far from a done deal at this point, and China could block the acquisition.
At the end of the day, the analysts feel that Nvidia stock is a solid buy. And if all goes according to plan, NVDA could outperform their average price target of $188.70 and hit RBC Capital’s $217 target. But I wouldn’t count on everything going right for Nvidia stock, especially with the huge China variable and rival AMD coming at NVDA with guns blazing.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.