2023 isn't even halfway over, and already Nvidia (NVDA 2.66%) has added more than $400 billion in market value as the stock has more than doubled this year.
Nvidia has been on a steady upward trajectory for one simple reason: AI. It's arguably the stock with the most to gain from the boom in artificial intelligence (AI) that was sparked by the launch of ChatGPT last November, and that's why everyone is talking about it.
Companies of all stripes are racing to develop their own AI tools and find ways to leverage generative AI programs like ChatGPT to work for them. In artificial intelligence, nearly all roads lead to Nvidia. Here's why.
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Nvidia has a head start in AI chips
Nvidia invented the graphics processing unit (GPU), a type of chip designed for creating images and graphics in real time. GPUs are distinct from central processing units (CPUs), which are meant for general purpose computing.
Nvidia's GPUs have become essential in a wide range of applications, including gaming, autonomous vehicles, cryptocurrency mining, virtual reality, and now artificial intelligence. Its chips are often used for AI and machine learning applications, and are well designed for the training of neural networks.
The company has established dominant market share in AI semiconductors. HSBC, for example, said that it expects Nvidia to have 90% market share in fiscal 2024, and concluded that AI chips will fetch a price that's 10 to 20 times higher than standard gaming chips, which could drive a surge in the company's revenue without the need for added volume.
While there's still a lot of uncertainty around the market potential for AI and the AI chip market, Gartner forecast that the share of specialized chips used in data centers was set to rise to more than 15% in 2026, up from less than 3% in 2020.
Nvidia's fourth-quarter earnings report in February showed the company struggling with the same headwinds as the rest of the industry as prices have fallen and volumes are down due to a supply chain glut.
Revenue in the quarter fell 21% to $6.05 billion due to a decline in demand for gaming chips, and adjusted earnings per share was down 33% to $0.88.
However, the company talked up its AI investments, including a new AI supercomputer and its AI-as-a-service model, which is being offered in partnership with cloud infrastructure companies, allowing customers to do things like develop large language models, take advantage of AI neural rendering, and use pre-trained generative AI models.
Is Nvidia stock a buy?
There's a lot to like about Nvidia the business right now as it seems well positioned as something of a picks-and-shovels play in AI.
If anything is clear from the excitement around artificial intelligence and the rush of companies looking for new ways to monetize, it's that demand for AI chips should soar. Nvidia stands to capitalize on that boom, but it takes more than a great business to be a great stock. Investors also have to buy it at a reasonable price, and Nvidia shares are expensive after its surge.
The stock currently trades at a price-to-earnings ratio of around 100, but that price seems to be partly a reflection of the significant growth ahead in artificial intelligence.
There's a lot of hype around AI right now, but Nvidia seems like one of the few AI stocks that can live up to that hype. Yet investors should be aware that there's still a lot of uncertainty in the market potential around AI, and Nvidia's price tag makes it vulnerable to a pullback.
For long-term investors, Nvidia still looks like a good option, but you may want to consider dollar-cost averaging into the stock to cushion a potential pullback in its price.
Expect a big swing from the stock when Nvidia reports earnings on May 24, even as analysts expect revenue and profits to decline once again.
