Nvidia Corporation (NASDAQ:NVDA) shares have spent much of December in retreat. Investors have been selling off their shares in the chipmaker, looking for a cheaper way to profit from semiconductor stocks. That selloff came to an abrupt end on Wednesday. After closing Tuesday at $283.37, NVDA stock surged to a $304.59 close on Wednesday, Dec. 15. That amounted to a 7.5% gain on the day. However, the very next day, Thursday, it lost 7% and then dipped again on Monday to around $274.
Why the, albeit brief, reversal in fortune for NVDA stock?
It appears to trace back to analyst commentary. Not on Nvidia specifically — in fact the analyst had a neutral take on the company — but on growth in the cloud computing market. Growth in cloud computing use means a raised demand for servers in data centers. And that could translate into more demand for Nvidia’s chips.
I’ll get into the details shortly, but Wednesday’s big move in NVDA stock serves as a warning for those who have been waiting for the chance to add this high-flying semiconductor stock to their portfolio: the recovery could begin in earnest at any time.
KeyBanc Analyst Commentary Triggers NVDA Stock Pop
Nvidia shares had been on a roll in 2021. Through Nov. 29, its growth stood at 156% since the start of the year. Semiconductor stocks in general had been hot as investors scrambled to take advantage of a global chip shortage. However, NVDA stock was getting pricey as a semiconductor play, and much of December turned into a selloff.
That changed abruptly on Dec. 15. The day before, KeyBanc analyst John Vinn published commentary outlining growth in the cloud computing industry. Vinn’s research showed that cloud computing service instances (virtual servers) increased 29% year-over-year in November.
Why is this significant for NVDA stock?
So those cloud computing instances may be virtual, but with that growth comes the need for cloud providers to buy additional servers to host them. More servers means more processors, and Nvidia just happens to be a player in the data center processor market. KeyBanc was actually more bullish about Nvidia’s competition — the instances running on Nvidia silicon grew at 25%, a lower rate than others — but it appears the news was enough to put an end to the NVDA stock selloff.
At least for a day.
About Nvidia’s Data Center Business
Taking the KeyBanc analyst commentary out of the equation, just how important is Nvidia’s data center business?
After all, when most of us think about Nvidia, what comes to mind is graphics cards. The company’s core business has always been selling graphics cards for computers. The past year has been full of headlines about PC gamers venting their frustration over still being unable to snag an Nvidia RTX 30 series graphics card. Those cards are also hotly in demand for cryptocurrency mining.
Nvidia’s latest quarter tells an interesting story. When the company reported its third-quarter earnings on Nov. 17, gaming revenue set a record. Gaming (predominantly those RTX 30 graphics cards) remained the company’s largest source of revenue, at $3.22 billion.
However, data center revenue also set a record, at $2.94 billion. It trailed gaming by a small margin and with a year-over-year (YoY) growth rate of 55%, data center revenue beat gaming’s 42% increase. At the time, the company’s CEO stated:
“Demand for NVIDIA AI is surging, driven by hyperscale and cloud scale-out, and broadening adoption by more than 25,000 companies.”
It’s not surprising that Nvidia stock popped on its Q3 earnings, culminating in an all-time high close on Nov. 29.
NVDA Stock and the Growing Cloud Market
We know the cloud computing market is huge and growing, but what about the market specifically for the chips that power those cloud computing servers?
Research And Markets published a report in October that covers that industry specifically. According to the data, the growth opportunity for data center chip sales between 2021 and 2025 is expected to be $18.77 billion. That represents a compound annual growth rate (CAGR) of 22.54%, and Nvidia is one of the primary semiconductor vendors set to benefit from that increase in spending.
The market reacted on Wednesday to KeyBanc’s reminder of that data center potential. The NVDA stock rally was short-lived, but it could easily have been the catalyst that kicked off the NVDA stock recovery.
Bottom Line on NVDA Stock
Despite its performance over the past three weeks, the majority of investment analysts like what they see when it comes to NVDA stock. Checking with the Wall Street Journal, NVDA gets a consensus “overweight” rating from the analysts it polled, with a $341.51 average price target. NVDA stock also earns a “B” rating in my Portfolio Grader.
Wednesday’s surge in NVDA’s stock price may have been specific to cloud computing, and brief, but that’s just one of many reasons to like Nvidia. If you’ve been waiting to add this stock to your portfolio but were hoping it might have further to fall, it may be time to make a move before the next rally turns into a recovery.
On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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