Whether you're a professional stock trader or take a more casual approach to investing, chances are you know 2023 has been all about artificial intelligence (AI).
The launch of OpenAI's ChatGPT last November stunned the tech world with its ability to produce human-like dialogue and kicked off an AI race among some of the world's biggest companies. It seems nearly every earnings call held by a tech company these days is centered around AI and how they're going to cash in on the current boom.
One of the companies to benefit most from the AI frenzy has been Nvidia (NVDA -0.29%). It is one of the few producing chips capable of running and developing AI models, making it an invaluable resource to the sector. As a result, bullish investors have boosted Nvidia's stock 190% since Jan. 1.
Nvidia's swift stock rise is an excellent reason to learn more about this semiconductor company and potentially consider investing. Here are three things about Nvidia that smart investors know.
1. A majority market share in AI chips
It's not a big surprise that Nvidia holds an 80% to 95% market share in AI chips, far and away above its biggest competitors Advanced Micro Devices and Intel. However, you might not know why it was able to leap so far ahead of its peers.
Since its founding in 1993, Nvidia has made a name for itself by producing some of the most powerful graphics processing units (GPUs). The company almost singlehandedly created the consumer GPU market, which led to a boom in PC gaming as gamers worldwide built custom computers powered by Nvidia hardware.
The tech giant's success in GPUs attracted other companies seeking high-powered chips, like Amazon Web Services (AWS). Nvidia's chips have powered AWS for over a decade now, steadily growing the company's data center business. However, Nvidia's biggest claim in AI is its position as the primary supplier of GPUs to ChatGPT, which used about 20,000 chips in 2020. This partnership has also led Nvidia to similarly power Alphabet's competing AI chatbot, Bard.
Nvidia's GPUs make it best-positioned to profit substantially from the AI industry with its ability to supply its hardware to the entire market.
2. Potential trouble abroad
Strained relations between the U.S. and China have caused Washington to implement restrictions that make it more difficult for the East Asian country to acquire technology with military applications -- and that includes chips. These restrictions will hit Nvidia particularly hard, with its CEO Jensen Huang saying they had left the company with its "hands tied behind our back," according to a Financial Times report.
As in the U.S., China experienced an explosion in generative AI this year, leading companies like Tencent, Alibaba, Baidu, and more to place orders with Nvidia. The company has responded to the restrictions by developing less powerful chips, the A800 and H800. However, further constraints by the U.S. could also prevent these exports.
Nvidia CFO Colette Kress has said China historically made up between 20% to 25% of the company's data center revenue, with its earnings negatively affected over the long term if these restrictions come to fruition.
More updates on the export regulations are due to be released over the summer. Keeping the situation on your radar would be wise, and other companies like AMD could similarly be affected.
3. There are cheaper ways to invest in AI
Nvidia's massive stock boost this year has immensely benefited current investors. However, it has also made its stock far more expensive than other leading names in AI. The chart below illustrates how Nvidia's forward price-to-earnings ratio is significantly higher than those of AMD, Microsoft, and Alphabet, which are all making promising inroads in the market.
Data by YCharts
Moreover, Nvidia's price-to-free cash flow multiple, another good metric to determine a stock's value, currently stands at 207. By contrast, AMD's, Microsoft's, and Alphabet's are 73, 44, and 25, respectively. These other companies may not be dominating AI chips like Nvidia, but they've all pivoted their businesses to developing the industry and have solid outlooks over the long term.
However, if your heart is set on Nvidia, it's not all bad news. The longer you hold its stock, the less its current price will matter. The company's shares have risen 614% in the past five years, and with the power of AI behind it, there's no telling how far it will soar over the next half-decade.
