Up by a whopping 87% year to date, Nvidia's (NVDA 6.18%) bull run is already in full swing. The company can benefit massively from the megatrend in generative artificial intelligence (AI) technology without having to take on the risk of developing its own consumer-focused chatbots.
Let's discuss three reasons why it isn't too late for investors to hop aboard.
A "picks-and-shovels" strategy
In the 19th century, gold was discovered in California, leading to what is known as the gold rush, as thousands of miners flooded into the mountains to try to make their fortunes. Perhaps surprisingly, the biggest beneficiaries of this boom were the people who sold jeans, picks, and shovels, not the miners themselves. If you liken AI technology to a modern gold rush, the picks and shovels would be Nvidia chips.
Industry analysts at Omdia claim the ChatGPT chatbot used 10,000 of Nvidia's A100 GPUs to train its model. Such chips can cost upward of $10,000 each, which makes this a revenue growth opportunity as the AI opportunity expands. According to management, Nvidia is working with thousands of AI-related start-ups in a variety of industries, which can help it foster a diversified portfolio of customer relationships.
Nvidia CEO Jensen Huang believes that AI is at an inflection point. The company is well-positioned to benefit from the increasing interest in generative AI technology, which has already helped to drive a record $15.01 billion in fiscal-year revenue from the data center segment alone -- which includes sales of its AI chips.
Nvidia can handle the competition
Nvidia is not the only company tackling the infrastructure side of the AI market. In April, tech giant Alphabet submitted a research paper showing that its fourth-generation Google AI chip is 1.7 times faster and 1.9 times more power efficient than the A100. But unfortunately for Google, Nvidia wasn't sleeping at the wheel.
Last year, the company announced its H100 chip, which is 4.5x faster than the A100, blasting through performance records related to machine learning. Nvidia's technological lead isn't going anywhere. And this gives the company a solid moat.
According to CNBC, the H100 sells for over $40,000 on third-party websites like eBay.com.The high prices suggest there may be significant unmet demand for the product, although it is difficult to find official base price data on Nvidia's website.
Image source: Getty Images.
Quality comes at a premium
One of the hardest things to do in the stock market is find a quality company at a low price. Nvidia certainly meets the quality side of the equation. But with a price-to-earnings (P/E) multiple of 60, shares are quite expensive compared to the S&P 500 average of 22. That said, you tend to get what you pay for. And investors should look at more than just near-term profits when evaluating a stock.
Nvidia can generate substantial top- and bottom-line growth as the generative AI industry matures. Further, its technological lead over rivals gives it an economic moat, which can help protect market share for decades. While the company is no longer the screaming buy it was at the beginning of 2023, the long-term bull run might be just getting started.
Investors should also note that Nvidia's recent partnerships and collaborations, as well as its expansion of AI cloud service offerings, show a commitment to ongoing innovation and growth, positioning the company for continued success in the future.
