Why You Should (and Shouldn't) Buy NVIDIA

By Sean O'Reilly and Chris Neiger Markets Fool.com

NVIDIA(NASDAQ: NVDA), the graphics-chip maker and leader in the burgeoning virtual-reality and driverless-car markets, has been on an absolute tear over the past 12 months, with shares up over 340%. At this point, it's natural for investors to wonder if it's too late to buy a few shares -- this run could just bethe start of NVIDIA's path to world domination, or it could be the very top of a bubble-like valuation.

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While the truth probably lies somewhere in the middle, there are certain types of investors who should, and shouldn't, invest in NVIDIA no matter what the reality is. So with this fundamental truth in mind, we asked two of The Motley Fool's best and brightest just who should (and shouldn't) invest in NVIDIA. Here's what they had to say.

Image source: Getty Images.

You firmly believe in the growth story

Chris Neiger: NVIDIA has caught the eye of many tech investors with its stock price run-up in 2016. The investor optimism is more than just speculation, though. NVIDIA is already a dominant force in the GPU market, with more than 70% of the discrete desktop GPU market share, and it shows no signs of ceding its lead to rival AMD. That's important, because the company brings in about 62% of its total revenue from its gaming GPU segment.

If that were the only thing going for NVIDIA, it would probably be enough. But one of the reasons this company is so exciting is that it's taking what it knows about GPUs and applying it to all-new growth markets -- namely, semi-autonomous driving and high-powered, artificially intelligent supercomputers. The company's DGX-1 computer uses deep learning and artificial-intelligence analytics to generate as much processing power as 250 conventional servers. Data-center revenue is NVIDIA's second-largest business segment, and the company is proving it can innovate like no other in the space.

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In the semi-autonomous-driving market, NVIDIA's Drive PX 2 supercomputer is being used as the onboard computer for many self-driving vehicles. The computer uses NVIDIA's GPUs to processes visual information in real time and give cars a type of situational awareness. Eighty automakers and Tier 1 automotive suppliers are already using NVIDIA's Drive PX system, and Tesla(NASDAQ: TSLA) just became one of NVIDA's most recent customers. Some investors may be scared away by the company's pricey P/E ratio of 74, but NVIDIA should continue to be a long-term growth story as long as the company continues growing gaming revenue at a healthy clip and its investments in AI and semi-autonomous driving continue to pay off.

Because everyone else is

Sean O'Reilly: NVIDIA remains the undisputed king of advanced graphics chips. What's more, thanks to itsNVIDIADrive PX 2 computing platform, ithas a respectable stake in the future of driverless cars and artificial intelligence. Given these catalysts, it's shouldn't have been surprising that NVIDIA was one of the best performing stocks of 2017. Yet that awe-inspiring performance is precisely where the danger in investing in the company now lies.

To invest in any company, not just NVIDIA, you need to believe in that company and perform your due diligence. You need to read conference calls, have faith in management's vision for the future, and find the current valuation compelling, because at some point, your faith in the company will be tested. It's not unheard of for a stock that's rewarded shareholders with huge gains in a short period to fall, 10%, 20%, or even 30%, only to then rocket ever higher -- leaving those who sold in the pullback out in the cold.

NVIDIA has a fantastic suite of offerings, led by its GeForce, PureVideo, nForce, GoForce, and Quadro chips,and a foothold in a number of potentially huge markets. NVIDIA is exceptional at what it does -- but they are not unassailable (yet) and it's worth repeating that those big catalysts are potentially huge markets. Right now, the company is a non-monopolistic business, playing in nascent tech segments, and it's priced at 40 times forward FY 2017 earnings. Even further out, the company currently trades at 23 times FY 2020 estimates earnings, as estimated by S&P Global Market Intelligence. If NVIDIA stumbles with quarterly results or offers up guidance that implies the business will slow down, the stock price will more than likely take a hit as expectations of future profits normalize.

Bottom line: Don't just buy into NVIDIA because it's the current hot stock. Investors interested in the business need to have the stomach for growth investing. You will be tested, and the last thing you want to do with a great business like NVIDIA is to sell out when Mr. Market throws a fit.

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Chris Neiger has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia and Tesla. The Motley Fool has a disclosure policy.