Over the last several weeks, investors listened to corporate executives discuss the topic of artificial intelligence (AI) on earnings calls. While AI seems like the new buzzword, there are some legitimate reasons to be bullish.
Perhaps no other company has benefited more from the AI mania than chipmaker Nvidia (NVDA -3.33%). Nvidia's earnings report was solid, but its guidance was so far ahead of Wall Street expectations that the stock jumped well over 30% and the company briefly joined the $1 trillion market cap club. What really stood out on the earnings call was how well the company's data center business performed.
Image source: Nvidia investor presentation.
All eyes should be on data center
The chart above is from Nvidia's Q1 fiscal 2024 earnings investor presentation. For the quarter ended April 30, Nvidia's data center revenue grew 14% year over year, achieving a record of $4.3 billion. While setting a record in its database segment is exciting, investors really cheered due to the company's Q2 guidance of $11 billion in total revenue.
On the earnings call, Nvidia CFO Colette Kress attributed this growth to the data center business. She stated: "We expect this sequential growth to largely be driven by data center, reflecting a steep increase in demand related to generative AI and large language models. This demand has extended our data center visibility out a few quarters, and we have procured substantially higher supply for the second half of the year."
The sky is the limit
Kress' commentary on the data center business should not be taken lightly. While Q1 results were respectable, the more important point Kress makes is that demand for applications that leverage AI, such as quantum computing and machine learning, is so strong that Nvidia has a lot of visibility into future business.
This dynamic is important. For the last couple of years, investors have been told that semiconductor companies like Nvidia and Advanced Micro Devices are experiencing myriad challenges such as supply chain disruptions and waning consumer demand due to the COVID-19 pandemic.
Now, however, some of these issues seem to be drying up. Nvidia's technology is currently center-stage when it comes to the AI revolution. Demand for its chips and its growing suite of data center products should continue to grow as companies of all sizes and across many different industries are figuring out how generative AI can be a catalyst for their business.
Welcome to the three commas club
While Nvidia briefly joined $1 trillion stock cohort comprised of Apple, Microsoft, Alphabet, and Amazon, the company's market capitalization has fallen to roughly $955 billion. That's still not bad for a company that's generated $27 billion in revenue over the last 12 months.
Nvidia's current forward price-to-earnings (P/E) ratio is 52. Comparable companies like AMD and Taiwan Semiconductor trade with a forward P/E of 42 and 19, respectively. It's obvious that investors are placing a premium on Nvidia. In fact, there's an argument to be made that the future business from AI is, at least in part, priced into the stock.
Nonetheless, it's crucial for long-term investors to zoom out and consider the broader picture. Nvidia will provide ample exposure to AI for your portfolio, and the company's near-to-intermediate pipeline appears encouraging.
While the stock currently seems pricey compared to other chipmakers, there's something to be said for the fact that the company was the first of its kind to reach the trillion-dollar milestone. Moreover, as its data center business continues to blossom, Nvidia could very well cement itself as a member of the trillion-dollar market cap club in the long term.
