With the release of OpenAI's ChatGPT in late 2022, generative artificial intelligence (AI) shifted from another tech hype cycle to a megatrend capable of revolutionizing many industries by augmenting human labor and creativity. Let's explore three reasons Nvidia (NVDA -3.33%) is a great way to bet on this opportunity.
1. The potential addressable market is massive
Analysts at Next Move Strategy Consulting expect the AI market to grow 20-fold to almost $2 trillion by the end of 2030 as the technology penetrates industries ranging from supply chains to mobile applications. And if you liken this opportunity to the California gold rush, Nvidia would be selling the picks and shovels instead of prospecting -- a less glamorous strategy that can be safer and more lucrative.
According to Omdia research, Nvidia controls a whopping 80% market share in the advanced graphics processing units (GPUs) used to train AI platforms like ChatGPT, which used 10,000 of its A100 chips. And as generative AI platforms update and become more advanced, they are expected to use an even greater volume of similar hardware.
Nvidia's A100s cost roughly $10,000 each, so growth in AI-related demand could become a significant revenue driver. The company is also integrating AI into its traditional business, with CEO Jensen Huang believing the technology can help accelerate computer chip manufacturing by unlocking production efficiencies.
2. Nvidia's moat remains imposing
Nvidia isn't the only company that can design AI-capable chips. Alphabet, the parent company of Google, is joining the race with its own custom-developed tensor processing unit (TPU), a rival to Nvidia's GPU designed to work faster while using fewer resources. Alphabet claims that a supercomputer powered by its latest fourth-generation TPU outperformed Nvidia's A100 by up to 1.7 times in speed while using less power.
But while that achievement has earned some headlines, Nvidia hasn't been asleep at the wheel. In early 2022, the company announced its H100 GPU, the successor to the A100, which is a staggering nine times faster for AI training than its predecessor.
Image source: Getty Images.
Actually, Alphabet could present more of an opportunity than a threat for Nvidia. In May, the internet search giant announced its A3 supercomputers designed to help clients train the most demanding generative AI models. The kicker: A3 runs on Nvidia's H100 chips and represents yet another vote of confidence in the GPU maker's technological lead.
Nvidia says it plans to continue innovating with the goal of eventually making AI training more than "1 million percent faster" over the long term.
3. You get what you pay for
Nvidia's share are up 100% since the start of 2023, so its massive potential in the AI industry has not gone unnoticed by the market. And with a forward price-to-earnings multiple of 63, shares are undeniably expensive compared to the Nasdaq Composite's average of 24. The high valuation could limit the company's near-term upside potential.
But you get what you pay for in the stock market. And generally, the highest-quality companies will trade at a premium. Plus, Nvidia has a lot of things going for it to help justify the price tag.
The chipmaker's picks-and-shovels niche will allow it to benefit from the growth in generative AI without taking on the risk of developing its own consumer-facing platform. And its technological advantages in chip design will be its moat against the competition. The shares still look like a buy for investors with a long-term perspective.
