After losing almost half of its value in 2022, Nvidia (NVDA 1.69%) has rallied back in 2023 with an artificial intelligence (AI)-fueled vengeance. As of Aug. 29, Nvidia's stock is up over 235%. Other big tech companies have also rallied this year, but none compare to what Nvidia has done.
Many investors are wondering if Nvidia's run is a bubble waiting to burst or a sign that the company is a powerhouse destined for more gains ahead. My guess is the latter.
A chain reaction that's padded Nvidia's bottom line
Nvidia has benefited from an overall change in market sentiment toward tech stocks, but it's also received an extra boost from investors banking on AI's potential. While Nvidia doesn't make consumer AI tools, it's a key player in forming the AI ecosystem.
Large language models that power AI tools like OpenAI's ChatGPT and Alphabet's Google Bard need to be trained using a large amount of data. Unlike an individual's files that can be saved on a laptop or external hard drive, this vast amount of data has to be stored in data centers.
These data centers contain storage drives, networking equipment, and servers powered by graphic processing units (GPUs) essential for machine learning. And guess who's the biggest producer of GPUs: Nvidia.
Living up to investor anticipation
There arguably hasn't been as anticipated of an earnings release in recent memory as Nvidia's results for the second quarter of its fiscal 2024 (ended July 30), and the company didn't disappoint.
Nvidia's $13.5 billion in revenue was more than double its Q2 2023 revenue, and its net income was up a whopping 843% year over year. Doubling revenue in a year isn't a small feat for a company of Nvidia's size, but the net income growth is borderline astonishing.
As the above chart shows, this increase is largely due to a jump in Nvidia's data center revenue. The $10.3 billion it made in that segment is a long ways from its $3.8 billion in Q2 2023 and the $2.4 billion in Q2 2022.
A transition to a new era right before our eyes
There seems to be a new era of technical advancement occurring. Companies of all sorts are transitioning and adapting to generative AI and accelerating computing, and they're relying heavily on Nvidia's products for this infrastructure change.
At first, it all seemed like hype, but now it's starting to feel like a true shift as companies put their wallets where their ambitions are. If things go as predicted, this is still the early stages of what this transition can do for Nvidia's bottom line (and its investors' returns).
In 2022, AI's total addressable market (TAM) globally was around $454 billion. In 2023, it's estimated to be just over $538 billion. By 2032, AI's TAM is predicted to be well over $2.5 trillion -- a compound annual growth rate of 19% over that span.
An expanding AI TAM should have a direct impact on Nvidia's financials for some time to come. If that isn't enough to convince potential investors, Nvidia's share buyback plan should be. The company announced a $25 billion buyback plan, which generally signals that a company feels confident in what the future holds.
Nvidia has called AI "the greatest technology force of our time." Those are strong words for a company whose role in its development is as integral as any. The future looks bright.
