2 growth stocks you can’t go wrong with
NVIDIA (NASDAQ: NVDA) the stock more than doubled in 2020 as the graphics specialist saw tremendous growth in its data centers and video game businesses. Smartphone giant Apple (NASDAQ: AAPL) has also made investors considerably wealthy this year despite the challenges posed by the coronavirus pandemic.
The outperformance posted by these two companies while the market as a whole has remained sluggish is not surprising. NVIDIA supplies graphics chips that play an important role in powering a wide variety of critical applications, from data centers to computers. He is one of the pioneers in artificial intelligence (AI) – a market that is in its early stages of growth. Apple, on the other hand, has diversified beyond smartphones and is eyeing new markets to enrich its user base.
It wouldn’t be surprising to see the two tech giants stay on top of their game even after a decade, as they expand into new areas for long-term growth. Let’s take a look at them.
NVIDIA can shape the future with its graphics cards
It’s been over a decade since I built my first PC (personal computer), and an NVIDIA graphics card was an important part of that setup for playing resource-intensive games. The story remains the same in 2020, with an NVIDIA GPU (Graphics Processing Unit) adding muscle to the current setup, but the company has come a long way. It now only makes GPUs for gaming.
NVIDIA has unlocked more apps for its GPUs over time. They now power data centers, supercomputers, cars and are even used for mining cryptocurrencies. The datacenter is now that of NVIDIA the biggest company with 45% of total revenue in the second quarter of fiscal 2021 – producing $ 1.75 billion in sales in the last quarter, down from just $ 151 million four years ago.
This indicates that NVIDIA may find new applications for its graphics cards capable of handling multiple complex calculations in parallel. And that makes NVIDIA’s GPUs ideal to allow AI technology – a market that would need chips worth hundreds of billions of dollars in the years to come.
According to a third-party estimate, the AI chip market could grow from just $ 5.6 billion in 2018 to over $ 83 billion in 2027 at a compound annual rate of 35%. Hardware accelerators such as GPUs are expected to remain in high demand for training and AI inference in the data center – an opportunity that could be worth up to $ 15 billion ($ 5 billion for training hardware). for AI and $ 10 billion for inference hardware) by 2025, according to McKinsey estimates.
NVIDIA is preparing to seize this opportunity with its A100 data center GPU based on the Ampere architecture. The chipmaker highlighted the latest earnings conference call that the A100 can incorporate both AI training and inference, and that it has already amassed an impressive list of customers.
The A100 offers NVIDIA’s biggest generational leap, boosting AI performance by 20 times over its predecessor. It’s also our first universal accelerator, unifying AI training and inference and fueling workloads, such as data analytics, scientific computing, genomics, advanced video analytics, 5G services and graphics.
The tastes of Google, Microsoft, Amazon Web Services, Ali Baba Cloud, Baidu Cloud, and Tencent Cloud offers AI solutions based on the A100. In addition, more than 50 servers based on the platform are expected to be launched by the end of the year by Cisco, Dell, Hewlett Packard Enterprise, and Lenovo.
As such, NVIDIA is preparing to extract billions from the lucrative AI chip market in the years to come. The company is also seated on other catalysts, such as self-driving cars and a massive upgrade cycle in PC graphics cards. All in all, it can be concluded that NVIDIA’s growth engines are not going to die out anytime soon and that the stock could continue to outperform the broader market.
Apple’s service ecosystem could be a source of money for years to come
Apple has remained strong in the smartphone game since the introduction of the first iPhone in 2007. The company is the world’s third-largest smartphone supplier with a 13.6% market share at the end of the second quarter of 2020, according to IDC.
But Apple isn’t just limited to smartphones: it now has five revenue streams covering both hardware and service offerings. The company has branched out into other hardware over time, such as smart home apparel and accessories, but its service business is one worth looking for.
While the iPhone still accounts for the lion’s share of Apple’s total revenue, the service industry has shown impressive growth over the years. In the third quarter of fiscal 2020, service activities accounted for 22% of total revenue and grew 15% compared to the previous year quarter. Meanwhile, the company’s iPhone revenue grew only 1.6% year-over-year.
The impressive growth in the service industry has helped Apple increase its overall revenue by 11% and earnings per share by 18%. Going forward, Apple is expected to maintain the impressive growth rate in the service business with the launch of several new offerings last year. The company had recorded a growth of 16% in service revenue in fiscal 2019 to $ 46 billion, and it achieved nearly $ 40 billion in revenue in the nine months of the current year.
Daniel Ives of Wedbush estimates that the services business could generate $ 60 billion in revenue in 2021, which is not surprising as it now offers a host of services such as Apple TV +, Apple Arcade, and Apple Card. For example, Apple priced its affordable video streaming service compared to its competitors and offers a free one-year subscription with the purchase of an Apple device.
In addition, the company is doing everything to bring more users into its ecosystem of services with the Apple One Pack which will include several services for a reduced monthly price. This could give the service business of the company a big boost, given that it is reportedly about to launch new iPhone 5G learn in a lucrative space.
It turns out that 5G smartphones should sell like hot cakes, as there would be millions of iPhone users who could upgrade their devices once the next-gen iPhones are released. This could help Apple attract more users to its service ecosystem and generate recurring revenue over the long term, even when hardware sales stagnate.
More importantly, the growth in services should ideally increase Apple’s earning capacity in the long run. The service business only accounts for 11.6% of Apple’s total cost of sales, but generates nearly 39% of gross margin. Specifically, services generated just over 67% gross margin in the last quarter, more than double the gross margin of 29.7% for the products business.
Overall, Apple could offer a solid combination of hardware and software growth in the years to come and remain a most important growth stocks Thanks to 5G revolution and a larger user base of services.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.