Nvidia is the right play in the chip space, this investor says

Semiconductor company Nvidia (Nvidia Stock Quote, Charts, News, Analysts, Financials NASDAQ:NVDA) has had a great year so far, but there should be more upside to come, according to portfolio manager Paul Harris, who likes the company’s orientation within the larger chip space.

“I think semis are really a unique place to be these days because they’ve become very strategically important not only globally but specifically to the United States,” said Harris, partner at Harris Douglas Asset Management, speaking on BNN Bloomberg on Thursday. “You saw that with [US President Joe Biden] talking about giving more money to help … bring fabrication even more to the United States.”

“Taiwan Semi is doing that and several other companies are actually setting up fabrications in the United States, so I think that semis have become very political but very important and they are at the core of a lot of technologies. So, I think there’s a reason why [Nvidia] will continue to do well,” he said.

The chip shortage is still the main talking point in the semi space, as the world continues to grapple with increasing demand for products containing microchips, sensors and electronics. Chip designers and fabricators are feeling the heat but so are other industries like the auto sector, where companies like GM, Volkswagen and Toyota have recently reported big drops in sales saying that the chip shortage is playing a role. Toyota has said its global production will be down by about 40 per cent while GM said sales in its most recent quarter were down by 30 per cent from last year, with a lack of completed vehicles to blame.

For Nvidia, the chip shortage has meant a period of huge expansion as the company is seeing demand explode for its processors in fields like gaming, AI and cryptocurrency mining, all industries going through their own growth periods.

“Enabled by the NVIDIA platform, developers are creating the most impactful technologies of our time – from natural language understanding and recommender systems, to autonomous vehicles and logistic centres, to digital biology and climate science, to metaverse worlds that obey the laws of physics,” said Nvidia CEO and founder Jensen Huang, speaking in a press release after the company’s second quarter fiscal 2022 earnings in August.

Nvidia saw revenue shoot up an incredible 68 per cent from a year earlier during its fiscal Q2 to $6.507 billion, while net income was up 282 per cent year-over-year and up 24 per cent sequentially to $2.374 billion or $1.04 per adjusted share. Analysts were expecting $6.33 billion in revenue and earnings of $1.01 per share. The company’s largest business segment, Gaming, saw revenue up 85 per cent to $3.06 billion while Nvidia’s Data Center business was up 35 per cent to $2.37 billion. 

“This quarter, we launched NVIDIA Base Command and Fleet Command to develop, deploy, scale and orchestrate the AI workloads that run on the NVIDIA AI Enterprise software suite. With our new enterprise software, wide range of NVIDIA-powered systems and global network of system and integration partners, we can accelerate the world’s largest industries racing to benefit from the transformative power of AI,” said Huang.

For Harris, the semi sector has Nvidia and Taiwan Semiconductor Mfg (Taiwan Semiconductor Stock Quote, Charts, News, Analysts, Financials NSDAQ:TSM) as two of his picks.

“Nvidia has been really in a massive sweet spot for semiconductors, whether it’s been on the cloud side for most of our servers or whether it’s on the cryptocurrency side — and a lot of their chips are used on that side and on gaming. So, they really are in their sweet spot of the semiconductor industry,” Harris said.

“The other company that’s always been very good to own is Taiwan Semi which produces most of the semiconductors for [many companies]. They’re actually the fabrication part of it and Nvidia is the design house for these things. It’s been a real sweet spot and I think semis will continue to do well, and Nvidia is not actually in that much of the cyclical part of the semiconductor industry so I think that’s what’s important about Nvidia,” he said.

Nvidia announced last year a blockbuster deal to merge with British chip designer Arm, owned by Softbank, a deal first announced at $40 billion in September 2020. But the regulatory hurdles are large and varied as along with notable competition issues, the merger has brought out geopolitical and national security concerns which have increasingly become at play in the sector. 

Nvidia has said that discussions with UK and US regulators are taking longer than expected, with the window to close the deal still giving the two companies until the end of 2022.

Harris says the Arm acquisition is one factor for investors to keep in mind.

“They’re trying to buy Arm from Softbank, Arm Semiconductors, and so they’re in the middle of that and there have been some issues with people not wanting Nvidia buying it,” he said. “There’s always this kind of execution risk and other issues that go along with a big acquisition.”