Few companies are more vital to the proliferation of artificial intelligence (AI) technology than Nvidia (NVDA +2.59%). Even before AI became the hot trend in the business world, Nvidia heavily invested in the technology because it knew this day was coming.
Nvidia is set to benefit heavily from the wider adoption of AI systems, as it has multiple products that are vital for AI to succeed. It's also helping other companies create their AI solutions, making it a critical link in the AI chain.
Nvidia has multiple AI solutions
Nvidia got its start by creating the graphics processing unit (GPU). At first, this hardware was used almost exclusively to quickly process the intense calculations needed to create high-quality graphics. Since then, that efficiency in processing intense calculations has been put to use in a host of applications -- among them running engineering simulations, mining cryptocurrencies, and training AI models.
Most AI supercomputers don't just utilize one or two GPUs; instead, they feature arrays of thousands. For example, Meta Platforms is expanding its AI Research SuperCluster from 6,080 GPUs to 16,000 to increase its performance by 250%.
But most companies don't have the resources or need to create a supercomputer of that size. That's where Nvidia's DGX cloud comes in.
NASDAQ: NVDA
Key Data Points
Nvidia's cloud offering allows clients to sign up for a specified amount of AI-computing power. Because they are buying from Nvidia, they never have to worry about equipment going out of date. Additionally, its AI training service offers multiple tools like workload management and collaboration, giving clients everything they need to train models efficiently.
But that's just one step of the process for rolling out an AI-powered product.
Nvidia also has multiple AI tools like text generation, chatbots meant for customer support, protein prediction for chemists, and more.
In the old days, Nvidia would sell a GPU to a customer and then be essentially finished with that customer until they were ready to purchase another. Now, the company is working to become more subscription-like, doing business steadily with clients who utilize its AI framework.
While that paints a rosy picture of Nvidia's upside, the stock is already trading like it has achieved its mission.
Nvidia's business isn't doing great
Contrary to what many involved in the adoption of AI might think, Nvidia's business is struggling. Thanks to a weak PC market, its overall revenue fell by 21% in the fourth quarter of its fiscal 2023, which ended Jan. 29. Additionally, revenues from its data center segment (which encompasses its AI solutions) rose 11% year over year, but fell 6% sequentially. This segment hasn't historically fallen due to quarterly forces, so investors should pay close attention to its results when Nvidia reports its fiscal Q1 results on May 24.
Falling revenue has wreaked havoc on Nvidia's profit margins too: Earnings per share (EPS) fell 52% to $0.57 last quarter. That helped push its price-to-earnings (P/E) ratio up to an unusually high level.
NVDA PE Ratio data by YCharts.
Because Nvidia isn't currently optimized for profits, this may be the wrong metric to consider. Instead, investors should measure it based on its forward P/E ratio or price-to-sales (P/S) ratio to see how the company stacks up from a historical standpoint. However, both of these metrics have also reached relatively high levels.
NVDA PS Ratio data by YCharts.
Trading at 26 times sales, Nvidia is valued higher than many software companies that are growing much faster. Additionally, its forward P/E indicates the stock is much more expensive than it has been for most of its history, even when comparing it to the trailing earnings.
While Nvidia will play a massive role in the world of AI technology, I'm skeptical about how much upside the stock has left due to its already high valuation. Valuation shouldn't determine if you sell a stock, but it can inform your decisions about position sizing. Because Nvidia has reached nosebleed levels, I've kept my Nvidia position relatively small; that way, I'm protected if the valuation suddenly drops. But if I'm wrong and the stock continues to rise, I'll still benefit.
