In the months since the release of Chat-GPT, the accelerating demand for artificial intelligence (AI) has been breathtaking. Consumers are transfixed by the advances in generative AI bots, which can carry on human-like conversations, answer complex, multipart questions, summarize information, and even create original content -- including text, images, and video. Company leaders have been similarly smitten, scrambling to integrate the next-generation technology into business operations.
The common thread that runs through these developments is the graphics processing units (GPUs) that provide the computational horsepower necessary to create and run these AI models. As the pioneer and trusted name in GPUs, Nvidia (NVDA 5.50%) has been at the forefront of this technological transformation -- a fact that was all too clear in its quarterly report.
Image source: Nvidia.
A robust performance
Nvidia announced the results for its fiscal 2024 first-quarter (ended April 30) after the market close on Wednesday, and all eyes were focused on the impact of AI on its performance -- and it did not disappoint.
The company reported revenue of $7.19 billion, down 13% year over year -- but an increase of 19% sequentially, which suggested its recovery was well and truly underway. Nvidia's performance carried through to the bottom line, with non-GAAP earnings per share of $1.09, down 20% year over year, but up 24% sequentially.
To give those numbers some context, analysts' consensus estimates were calling for revenue of $6.5 billion and EPS of $0.92, so Nvidia's results sailed past expectations.
You can't spell Nvidia without "A" and "I"
While investors were struck by Nvidia's surprisingly robust performance, looking just a little deeper reveals the catalyst for the results -- AI.
Nvidia's data center segment -- which includes semiconductors used in data centers, AI applications, and cloud computing -- carried the day. Revenue for the segment climbed to $4.28 billion -- a new quarterly record -- up 14% year over year and 18% sequentially. CFO Colette Kress said the robust results were driven by "growing demand for generative AI and large language models" using Nvidia GPUs for AI. She went on to point out that there was "strong demand from large consumer internet companies and cloud service providers," for the company's specialized AI processors.
Nvidia's gaming segment continued its measured recovery, with revenue of $2.24 billion, down 38% year over year, but improving 22% sequentially.
CEO Jensen Huang made the argument that there's more to come. "A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process," he said.
Is the stock a buy?
Nvidia not only set a new high watermark for its data center segment, but its forecast is mind-boggling. Management is guiding for revenue of $11 billion in the current quarter, which would represent growth of 33% year over year, while also representing its best quarter ever.
With all that as a backdrop, the quintessential investing question remains: Should you buy Nvidia stock right now? As with so many things in life, the answer will likely depend on your personal investing philosophy. The valuation is lofty to say the least, with the stock currently selling for 164 times trailing earnings and 27 times sales -- so you'd be hard pressed to find a value investor willing to buy at such nosebleed multiples.
But valuation can't be viewed in a vacuum and the size of the opportunity must be factored in. Estimates for the size of the AI market vary wildly. Cathie Wood of Ark Investment Management has it pegged at roughly $14 trillion by 2030, while management consulting firm McKinsey conservatively estimates the opportunity in a range of $3.5 trillion and $5.8 trillion annually. The fact is that no one truly knows just how far AI could go.
Personally, I've always been more of a big picture guy and I can confidently say I believe Nvidia stock will be much higher a few years down the road, though it will no doubt be volatile along the way. There's an old saying: "For those who believe, no explanation is necessary. For those who do not, no explanation will suffice."
