There's no getting around the impact that artificial intelligence (AI) has had on the market trajectory over the past year or so. Some would even argue that the latest advances in AI helped spark the rally in 2023, lifting Wall Street from its bear market doldrums.
Generative AI promises to unleash a wave of increased productivity, and stock market pundits are still debating how much it will ultimately be worth. Most estimates start at the $1 trillion range and go up from there.
An opportunity of this magnitude has businesses and investors alike scrambling to get their piece of the pie. Unfortunately, the mad dash has others decrying the trend as a bubble or hype.
Not so, says Arm Holdings CEO Rene Haas. In an interview with Bloomberg Technology, the chief executive said: "AI is not in any way, shape, or form a hype cycle. We believe that AI is the most profound opportunity in our lifetimes, and we're only at the beginning."
That's a bold proclamation, but one that's being echoed around the halls of the world's biggest tech companies. If Haas is right -- and I believe he is -- there's one AI stock I will continue buying hand over fist: Nvidia (NVDA 6.18%).
Image source: Getty Images.
Jack be nimble...
It's worth taking a moment to step back and look at how Nvidia got to be one of the dominant forces in technology today. The company pioneered the modern graphics processing unit (GPU), rendering lifelike images in video games.
The technology that made that all possible is parallel processing, which can tackle complex mathematical processing jobs by breaking them down into manageable bits and running them simultaneously. Nvidia quickly realized that this technology had far broader applications, pivoting to apply it to earlier versions of AI, cloud computing, data centers, self-driving technology, and more.
The company gained an early lead in machine learning -- an earlier branch of AI -- and boasts roughly 95% of that market, according to New Street Research. So when generative AI came calling, Nvidia was ready.
Much of the current demand for AI comes from cloud infrastructure providers, which make generative AI available to their customers. A look at Nvidia's cloud computing customer list reads like a who's who of technology: Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, and IBM Cloud all employ Nvidia processors in their cloud operations, as do Oracle Cloud, Baidu AI Cloud, Alibaba Cloud, and Tencent Cloud.
Nvidia is the gold standard for speeding data through the ether, controlling an estimated 95% of the GPUs used in the data center market, according to CFRA analyst Angelo Zino. Yet the opportunity is largely untapped. Rosenblatt analyst Hans Mosesmann posits that AI has ignited an upgrade cycle in the data center industry in order to handle the computational demands of generative AI. With an installed base worth roughly $1 trillion, the runway ahead is long.
Jack be quick...
The speed at which Nvidia innovates makes it difficult for its rivals to gain ground. As soon as a competitor comes out with a processor that's even close to Nvidia's capabilities, the company is ready to introduce the next generation of its lightning-fast chips. The reason? Nvidia boasts an ever-growing research and development (R&D) budget that could run a small country.
For example, in Nvidia's fiscal 2023 (ended Jan. 29, 2023), the company spent 27% of its total revenue -- $7.34 billion in all -- on R&D, creating the next generation of its cutting-edge technology. Nvidia has already spent $6.2 billion through the first three quarters of fiscal 2024, and that number will no doubt be higher when Nvidia issues its full-year report later this month.
This heavy spending has kept the GPU pioneer ahead of the AI curve, which is clear in its recent results. In its fiscal 2024 third quarter (ended Oct. 29), Nvidia generated record revenue of $18.1 billion, up 206% year over year. This resulted in diluted earnings per share of $3.71, which soared 1,274%. Despite easy comps from last year's market slump, the results were nonetheless remarkable.
Some investors cite Nvidia's lofty valuation as a reason to avoid the stock -- an understandable but myopic view, in my opinion. The stock is selling for 92 times earnings and 39 times sales, which seems outrageous at first glance but fails to take into account the company's triple-digit growth, which management expects will continue. However, using the more appropriate price/earnings-to-growth (PEG) ratio reveals a valuation of less than 1 -- the standard for an undervalued stock.
Given the company's industry-leading position, track record of growth, and surprisingly modest valuation, Nvidia is the one stock I plan to continue buying if AI is, indeed, "the most profound opportunity of our lifetimes."
