What happened

Week to date, shares of Nvidia (NVDA 2.45%) were up 12% as of 12:14 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence. The graphics specialist could be experiencing higher demand for artificial intelligence (AI) chips than originally thought.

After doing some scuttlebutt research, Morgan Stanley analysts named the stock a top pick, with a $500 near-term price target.  

So what

Morgan Stanley cited information from their industry contacts that suggest new customers are placing orders for AI chips at a greater pace than expected. This comes after Nvidia blew away expectations in its last earnings report by reporting a 19% sequential increase in revenue. 

Many investors anticipate we're just at the tip of the iceberg in AI demand, which could potentially lead to sustainable demand for Nvidia's AI chips, where it already has over 80% market share, according to various analyst estimates. 

S&P Global expects revenues from generative AI applications, which use text and video to create new content, to surge from $3.7 billion in 2023 to $36 billion by 2028. This points to a massive opportunity for Nvidia's data center business.

Now what

The stock is getting more expensive. Over the last year, Nvidia's price-to-sales ratio has increased nearly 200%, which accounts for almost all the stock's return. While the stock could still be a good investment, that will depend on the degree of Nvidia's runway of growth.

There are competing companies that are offering their own AI solutions that could nip away at Nvidia's market share. Investors should keep their eye on Advanced Micro Devices, which is currently ramping up investment in AI chips. Also, Amazon and Alphabet have designed their own purpose-built AI chips for their data centers. Earlier this year, Alphabet's Google revealed a new AI supercomputer that it claimed was faster than Nvidia's systems. 

Still, Nvidia is an expert in graphics processors, which are needed to train AI models. It's been a market share leader in GPUs for many years, making it the early favorite in the AI race.