Kevin O'Leary of Shark Tank fame knows a thing or two about business. He founded educational computer game maker SoftKey -- later called The Learning Company -- in 1986. SoftKey made its fortune with such well-known titles as Carmen Sandiego and Reader Rabbit. O'Leary ultimately sold the business to Mattel in 2002 for a cool $4 billion.
Mr. Wonderful, as he's known on the show, is known for his strong opinions, and he isn't afraid to speak his mind. O'Leary has often told entrepreneurs on the show, "Take that idea behind the barn and shoot it." While some find his approach callous, he takes a different view. "I'm there to tell them the truth. That's why they call me Mr. Wonderful."
As a successful investor, O'Leary is keenly following the accelerating adoption of artificial intelligence (AI). During a recent interview on Fox Business, he said that AI "will enhance productivity in America in remarkable ways." However, he warns investors that in most AI plays, "nobody's making any money" -- with one notable exception.
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Chipmaker to the AI stars
I won't keep you in suspense. O'Leary is referring to, of course, Nvidia (NVDA 1.56%). The chipmaker has become the poster child for the evolution of AI. O'Leary is quick to point out that while most investors think of Nvidia merely in terms of its semiconductors, the company actually develops complex platforms composed of hardware and software needed to train and run AI models.
Providing these turnkey solutions has made Nvidia the most sought-after name in AI. A quick look at the company's latest blockbuster results helps illustrate the potential. In its fiscal 2024 second quarter (ended July 30), Nvidia delivered record revenue of $13.5 billion, up 101% year over year, while generally accepted accounting principles (GAAP) earnings per share (EPS) of $2.48 surged 854%.
Nvidia CFO Colette Kress left no doubt as to what caused the remarkably robust results, saying, "Strong demand ... was primarily driven by the development of large language models and generative AI."
There's no doubt that when it comes to AI, Nvidia is the real moneymaker.
O'Leary takes "a different approach"
Since the onset of the AI boom, the valuations of stocks in the space have skyrocketed, and Nvidia is a classic example. The company's price-to-earnings (P/E) ratio recently experienced a steep decline, the result of its surge in profits. Yet even after being cut in half, the stock still sells for roughly 110 times its trailing 12-month earnings.
When asked about the "lofty levels" of AI stocks in the Fox Business interview, O'Leary responded, "I've taken a different approach," advocating a "picks-and-shovels" strategy. He's referring, of course, to a concept popularized by author Mark Twain: "During the gold rush, it's a good time to be in the pick-and-shovel business."
"Go back to the gold rush," O'Leary said. "The guys that made the real money sold the jeans and picks and shovels. And right now, that's Nvidia."
Most businesses are chasing the AI gold rush, working to adopt the latest generative AI tools that promise vast productivity gains. At the same time, Nvidia is selling the tools these businesses need in order to strike it rich. "Meanwhile," O'Leary noted in the interview, "for the guys that are selling the picks and shovels -- that's Nvidia -- I'll go there."
That's not to say O'Leary is oblivious to the lofty sticker price of Nvidia stock right now. He admits, "I'm having a hard time with the valuation right now ... It's wildly expensive." But he also notes that the company is outperforming everything else AI-related.
NASDAQ: NVDA
Key Data Points
Is Nvidia a buy?
This inevitably leads to the quintessential investing question: Is Nvidia a buy? There's no simple answer, and like so many things in life, the answer is a wishy-washy, "It depends."
Given the stock's lofty valuation, it's unlikely any argument would persuade value investors. However, while Nvidia has never been cheap, there are times it's been cheaper. For example, during the worst of the economic downturn, Nvidia stock was selling for 37 times earnings, though that price didn't last long.
For price-shy investors, the best strategy may be to buy a small position and add to it opportunistically when the valuation is lower.
If you're still not sold, consider this: Generative AI could represent the biggest secular trend in a generation, ultimately worth trillions of dollars. Cathie Wood's Ark Investment Management is among the technology's biggest advocates and her investment firm estimates that AI could represent a $14 trillion opportunity by 2030. More conservative prognostications are still mind-blowing. Morgan Stanley and Goldman Sachs estimate that the market will be worth $6 trillion and $7 trillion, respectively, by the end of the decade.
If these estimates are even close to correct, investors will want to have a stake in the company best positioned to capitalize on this opportunity. And as the picks-and-shovels play of AI, that's Nvidia.
