Despite what they might say, every investor dreams of getting in on the ground floor of the next disruptive technology and riding the wave to untold riches. There's little question that the siren song of 2023 comes as the result of rapid advances in the field of generative artificial intelligence (AI). It began with the launch of ChatGPT late last year and the realization that AI is likely just getting started.
Helping fuel the mad dash to AI stocks in none other than Cathie Wood, CEO and co-founder of Ark Investment Management. The firm recently released its Big Ideas 2023 report, and the conclusions are truly mind-boggling: "AI should increase the productivity of knowledge workers more than 4-fold by 2030 ... If vendors were to capture 10% of value created by their products, AI software could generate up to $14 trillion in revenue."
For investors looking to stake their claim, there's an argument to be made that no company is better positioned to profit from AI than Nvidia (NVDA 1.47%).
Image source: Nvidia.
The argument for Nvidia
Nvidia pioneered the modern graphics processing unit (GPU) and pivoted to adapt its flagship semiconductor to the monumental task of AI. Not only does it take a magnitude of data, but enough computational horsepower to train the systems. The secret sauce is the ability of these chips to use parallel processing -- or the capacity to run a multitude of complex calculations simultaneously. Nvidia then added complementary software and optimized its GPUs to the task of AI, giving them the ability to handle the enormous datasets necessary to train and then run AI programs.
There are plenty of other AI-centric companies out there to choose from, so why Nvidia? The company is a picks-and-shovels play, which got its name from a famous quote attributed to Mark Twain: "During the gold rush, it's a good time to be in the pick and shovel business." In this case, AI is the gold, and Nvidia is the picks and shovels business.
Nvidia is the clear leader in the market for GPUs used for artificial intelligence, but don't take my word for it. The company controls a 95% market share for the processors used for machine learning, according to data compiled by New Street Research. For example, the aforementioned ChatGPT, which helped fuel the recent AI revival, trained on more than 10,000 Nvidia GPUs. The next generation will require more than 30,000 GPUs, according to reports, helping to illustrate the growing opportunity.
Investors need look no further than Nvidia's results to detect the undercurrent. Even in the midst of a downturn, for its fiscal 2023 (ended Jan. 29), Nvidia's data center segment (which includes its AI-centric processors) grew 41% to $15 billion.
Every rose has its thorns
There are certainly risks involved with a stock like Nvidia. The most obvious concern is with its valuation, as the stock is currently selling for 19 times next year's sales -- the result of Nvidia's recent epic run. The stock has gained more than 150% since mid-October, fueled by excitement about the prospects of AI. It also didn't hurt that -- at the time the run began -- the stock was down 66% from its peak, driven lower by the downturn and concerns regarding a potential recession.
The other risk, albeit remote, is that one of Nvidia's competitors develops a superior semiconductor for AI applications. The most recent on-again, off-again rumor is that Microsoft has joined forces with rival Advanced Micro Devices, better known as AMD, to create an Nvidia-killer AI chip, though that remains unconfirmed.
What's more, back in 2015, Alphabet -- another deep-pocketed rival -- developed the Tensor Processing Unit (TPU), an application-specific integrated circuit (ASIC) designed to accelerate machine learning workloads. The processor is reportedly faster than Nvidia GPU in specific applications and extremely energy efficient -- but can only be used with Google's TensorFlow platform.
Given the dearth of direct competition -- and unless or until a rival comes up with a better solution for AI -- Nvidia remains the best way for investors to profit from the ongoing AI boom.
