Nvidia (NVDA 2.55%) stock has been on a tear in recent months, rebounding from a terrible 2022. The company's shares are up more than 194% since the start of the year, recently edging over a $1 trillion market cap and trading at its highest level ever, fueled by a boom in artificial intelligence (AI).
Wall Street has caught on to the fact that society is rapidly entering the AI age, as this technology is becoming more sophisticated and can potentially revolutionize many industries. Since Nvidia designs an essential component that powers the training and use of AI, the company is well-positioned to be one of the most prominent early winners in the AI space.
In the near and medium term, Nvidia will likely remain a winner in the AI space, but in the long term, there will likely be threats to the company's dominance. Here's why.
NASDAQ: NVDA
Key Data Points
AI is driving revenue growth
Traditional AI techniques, such as machine learning, deep learning, natural language processing, and computer vision, were in high demand even before OpenAI released the now-popular ChatGPT application. This is a generative AI (GenAI) chatbot trained on a massive dataset of text and code. The application can produce high-quality text, translate languages, create original content, and respond to queries.
Once OpenAI launched ChatGPT in late 2022, it produced a tidal wave of interest in all forms of AI, especially GenAI, sparking a race among many companies to create and use their own GenAI-powered chatbots.
Nvidia benefits from this increased demand for traditional AI and GenAI chatbots because it's the leading provider of graphics processing units (GPUs). These are specialized processors that can process large amounts of data more efficiently and cost-effectively than traditional semiconductors. Since GenAI models use enormous datasets and require significant computing power for training and generating the content, GPUs are ideal for GenAI applications.
The company reported record quarterly data center revenue in its first quarter fiscal 2024 report of $4.28 billion, up 18% over the previous quarter and 14% over last year's comparable period. Management attributed the growth to the popularity of its AI hardware and software products.
Chief Financial Officer Colette Kress said the following about GenAI during the earnings call:
Generative AI is driving exponential growth in compute requirements and a fast transition to Nvidia accelerated computing, which is the most versatile, most energy-efficient, and the lowest TCO [total cost of ownership] approach to train and deploying AI. Generative AI drove a significant upside in demand for our products, creating opportunities and broad-based global growth across our markets.
Such commentary augurs well for revenue growth in future quarters.
Investors liked what they heard. The stock jumped 24% the day after the May 24 earnings release. That's incredible in this market environment.
Since Nvidia has significant tailwinds from AI behind it, is it time to back up the truck and buy as many shares as possible? Here's why you may not want to do that.
Be wary of investing at current levels
The growth of GenAI increased Nvidia's worth, but not as high as its current valuation suggests. The market's excitement over AI stocks caused the stock's value to reach excessive levels, especially considering the company's risks. Nvidia trades at 222 times trailing-12-month earnings. Holy cow!
Although many in the media have been eager to declare a new bull market, we're not yet out of the danger zone. The Federal Reserve didn't raise interest rates at its June meeting but could easily continue increasing them later in the year. This could push the economy into a recession, which would be a terrible short-term scenario for all technology companies.
In the long term, Nvidia faces technological obsolescence risk from emerging technologies such as neuromorphic chips, a technology designed to mimic the human brain's workings. These chips have the potential to be more energy-efficient than GPUs, and companies could use this technology to power a wide variety of applications that currently use Nvidia's hardware. If neuromorphic chips become successful, it could threaten Nvidia's business.
Nvidia produces the best AI solutions today
Today, however, the market likes what Nvidia is cooking. It has multiple products geared toward AI and GenAI that are gaining traction in the market. Here are some of its newest innovations, including:
- Nvidia Hopper: The company's next-generation GPU architecture for modern AI data centers. The first Hopper-based GPU, the Nvidia H100, is the largest and most powerful on the market.
- Nvidia DGX Cloud: A cloud-based AI supercomputing service that provides companies with the systems and software required for training GenAI and other advanced AI models.
- Nvidia AI Foundations: A GenAI service that operates on the cloud and lets businesses personalize AI foundation models using their proprietary data. AI Foundations help Nvidia's clients to personalize each of their customer's products and services.
As the adoption of AI continues to grow, the demand for Nvidia's hardware and software should increase. The company is also investing in research and development of new AI technologies, including new AI chips, software, and services. Its investments in AI have positioned the company as a leader in the rapidly growing AI market.
This stock is a solid hold for investors who bought at lower levels. AI is a strong tailwind that should help Nvidia grow revenue and profits for at least five to 10 years. If you have yet to invest in the company, there's a decent chance you'll be able to buy it at lower levels on a stock pullback. If you're willing to risk a short-term loss, then consider buying it today.
