This year will likely go down in history as the year artificial intelligence (AI) came of age. AI exploded onto the scene with the debut of ChatGPT, which seemed to mark a paradigm shift for generative AI, which can generate original content. Not only can these next-gen systems engage in human-like conversations, but they can also leverage large amounts of data to create music and illustrations, summarize content, and even write computer code.
In a February speech at the Haas School of Business, Nvidia (NVDA -2.90%) CEO Jensen Huang made a startling pronouncement in which he declared that the introduction of ChatGPT was the "iPhone moment" of AI. At the time, many viewed the remark as hyperbole.
In the ensuing months, however, the adoption of AI has accelerated, and the speed at which businesses have embraced the technology makes Huang's declaration seem prophetic. And Nvidia is well-positioned to reap the rewards of this ongoing shift.
Image source: Getty Images.
Broad adoption of AI
"When was the last time we saw a piece of technology that is so versatile that it can solve problems and surprise people in so many ways so often?" Huang asked.
"So, the fact that you have this tool that can do all these different things is really surprising a lot of people around the world," Huang said. "Now for a lot of people who have been working on this, we have been waiting for this moment. This is the iPhone moment of artificial intelligence," he said, referring to the introduction of Apple's (AAPL -1.16%) flagship device. "This is the time when all those ideas within mobile computing and all that, it all came together in a product that everyone just kinda [said], I see it," he noted.
Huang could just as easily have been referring to Nvidia itself. As the primary provider of processors used in AI, Nvidia could be having its own iPhone moment.
The original iPhone moment
The debut of the original iPhone in 2007 was revolutionary in several ways. The device was the first modern smartphone, incorporating not only phone functionality and the musical capabilities of the iPod, but also internet connectivity -- all operated by a convenient touchscreen.
There was another thing that made the iPhone a game changer. Apple controlled both the hardware and the software on the device, allowing them to work together seamlessly. By ensuring the quality of all aspects of the finished product, Apple became the gold standard for smartphones. Since the debut of its iconic device, Apple stock has soared nearly 4,000%.
Nvidia is taking a similar approach to AI. And that strategy has been wildly successful so far.
Paving the way for success
Nvidia has long cornered the market on the chips used for AI. These graphics processing units (GPUs) provided the final piece of the technological puzzle needed to take these algorithms to the next level. GPUs possess the ability to multi-task, called parallel processing. This allows them to perform multiple complex mathematical calculations simultaneously, which helped render lifelike images in video games. Early on, researchers concluded this also makes them the ideal choice for the unique demands of AI.
Over the past few years, Nvidia's focus on cloud computing, hyperscale computing, and AI has been front and center. Rather than focus solely on the hardware, Nvidia increasingly offered packages that included both semiconductors and software, which worked seamlessly together, acting as turnkey solutions for businesses wanting to integrate AI into their operations.
So when the world pivoted to AI, Nvidia was ready.
Explosive forecast
Last week, when Nvidia released the results of its fiscal 2024 first quarter (ended April 30), the stunning demand for AI caught investors off guard. The company reported record-setting performance from its data center segment, attributed to "growing demand for generative AI and large language models," according to CFO Colette Kress.
However, what really moved the needle was Nvidia's forecast. The company said it expects second-quarter revenue of $11 billion, which would represent growth of 64% year over year and 53% sequentially. If the company reaches this audacious goal, it will also represent Nvidia's best quarter ever.
To buy, or not to buy?
In the face of this jaw-dropping guidance, Nvidia has been squarely in rally mode, pushing its market cap (briefly) above $1 trillion for the first time on Tuesday. However, this creates a conundrum for investors.
Nvidia currently trades for a whopping 208 times trailing-12-months earnings and 39 times sales. That's a lot of growth baked into the share price. Many will view this as too steep a price to pay.
Given the potential size of the market, though, the stock may not be as expensive as it appears at first glance. Management consulting firm McKinsey conservatively estimates the market opportunity for AI to be in a range of $3.5 trillion to $5.8 trillion annually, while Ark Investment Management believes it will be worth roughly $14 trillion by 2030.
If either of these estimates are anywhere close to reality, Nvidia's price could be much higher three to five years from now. Between now and then, there's a much greater likelihood for volatility -- so buyer beware.
