When Nvidia (NVDA 1.53%) published its first-quarter results at the end of May, the company's performance and forward guidance sent shockwaves through the investing world. The average analyst estimate had forecast that the company would guide for roughly $7.15 billion in second quarter, but the semiconductor leader wound up guiding for $11 billion in sales thanks to surging demand for artificial intelligence (AI).
The blowout quarterly results and guidance triggered massive gains for Nvidia stock and also helped power bullish momentum for other companies with AI exposure and the broader tech sector.
With a market capitalization of roughly $1 trillion, Nvidia currently ranks as the world's sixth-largest company. Believe it or not, the processing leader could go on to become the most valuable company within the next decade.
Hardware leadership and an emerging software and services business
As a leading provider of graphics processing units (GPUs) and accelerated processing systems, Nvidia is enjoying huge demand catalysts in conjunction with the rise of AI. Not only is the company positioned to provide key hardware for running advanced artificial intelligence applications through data centers, but it's also offering its own AI computation services and software.
Nvidia's DGX Cloud service already includes access to Nvidia AI software, AI frameworks, and pretrained models. Through DGX Cloud, Nvidia is also providing tools for building, refining, and operating custom large language and generative AI models.
It offers three distinct systems as part of the Nvidia AI Foundations package available in DGX Cloud:
- Nvidia NeMo is a toolset to for the construction and operation of large language models.
- Nvidia Picasso can be used for to create generative image, video, and 3D processing systems.
- Nvidia BioNeMo is a set of tools for building life-sciences applications.
The company is at the outset of building an AI-as-a-service (AIaaS) business component, and it has the potential to have a fundamentally transformative impact on the business.
AI services could make Nvidia far more profitable
In the first quarter, Nvidia recorded a non-GAAP (adjusted) gross margin of 67.1% -- already quite impressive given that hardware-oriented businesses typically have lower margins. But the company actually sees its margin improving. In the second quarter, the company is guiding for an adjusted gross margin of 70%. Pushing further into the AIaaS category could make the company's business even more profitable.
For a look at how service-based business models can have a transformative impact on business performance and stock valuation, just look to Microsoft. The software giant is currently the second-largest company in the world and has a market cap of approximately $2.5 trillion.
Over the last decade, Microsoft transitioned most of its key non-operating-system software products to subscription-based models. It also built a massive subscription-based cloud-infrastructure services business. These catalysts helped the company's share price soar roughly 850% over the last decade.
Because subscription-based revenue tends to be more dependable, predictable, and profitable, investors are typically willing to assign higher valuation multiples to companies with subscription-based businesses. It's possible that success with AIaaS initiatives could both significantly improve Nvidia's profit margin and make investors more willing to assign an even greater valuation premium to the company.
Early leadership could turn into lasting competitive advantages
Nvidia's leadership position in advanced processing hardware already looks quite strong and hard to disrupt, but the company may be in the early stages of building another powerful competitive advantage. While algorithms and processing hardware play very important roles in constructing and running AI systems, data can be thought of as the other key component. As AI models are trained with a greater array of relevant valuable data, they tend to become more effective and capable.
By establishing itself as an early leader in AIaaS offerings, Nvidia is positioned to generate huge swaths of valuable data that help to inform and improve its own artificial intelligence capabilities. Through these improvements, the company should be able to deliver better services for its customers.
In turn, this will once again generate more valuable data for the company, setting up a network effect and virtuous cycle that could turn early leadership in AI services into a long-term competitive edge that competitors find very difficult to disrupt.
Could Nvidia really become the world's biggest company?
With a market cap of roughly $2.9 trillion, Apple currently stands as the world's most valuable company. It's too early to say whether Nvidia will be able to claim the mantle for itself at some point over the next 10 years, but it's certainly within the realm of feasibility.
The tech specialist's GPUs and other advanced processors are already serving as a key foundation pushing the AI revolution forward, and the company is making smart moves and using its strengths to make software and services a new business pillar. Whether or not Nvidia goes on to become the biggest company in the world, there's a good chance it will be near the top of the list over the next decade.
