Artificial intelligence (AI) came of age last year, and the latest advancements caught the tech world off guard. Earlier forms of the technology have been around for decades, but these next-generation algorithms can do so much more. This includes creating a variety of original content, including images, text, and audio.
Beyond creating new content, generative AI can summarize emails and draft potential responses, create presentations from existing data, search the internet and company databases using specific criteria, and even draft and debug computer code.
Microsoft co-founder and former CEO Bill Gates has said, "The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone." That's a bold proclamation, but the chorus of tech aficionados that concur is growing louder.
While there are plenty of AI stocks poised to reap the benefits of this transition, the one with arguably the most potential upside is Nvidia (NVDA -1.54%).
Image source: Getty Images.
No longer just fun and games
Nvidia pioneered the graphics processing units (GPUs) that rendered the lifelike images that revolutionized the video game industry. However, it was the decision to adapt that technology to other applications that was instrumental in the company's success in AI. Parallel processing, the underlying technology that made GPUs so effective, takes computationally complex jobs and breaks them into smaller bits, making them more manageable.
From those humble beginnings, Nvidia has adapted its technology to a long and growing list of applications, including high-performance computing, cloud computing, data centers, and AI. Each new use case expanded the company's total addressable market, which management estimated at $1 trillion early last year -- and that was before the rapid adoption of generative AI began in earnest.
The company's recent results help illustrate the large and growing opportunity. In Nvidia's fiscal 2024 third quarter (ended Oct. 29), it delivered record revenue of $18.1 billion, which surged 206%, while its diluted earnings per share (EPS) of $3.71 soared 1,274%. While easy comps from the prior year skewed the overall results, the implications are clear. Lest there be any doubt, it was the company's data center segment, which includes chips used for AI processing, that did the heavy lifting -- generating record revenue of $14.5 billion, jumping 279% -- and accounting for 80% of the company's revenue.
Nvidia is scheduled to report the results of its fiscal fourth quarter next week, and its forecast was eye-opening. The company guided for record revenue of $20 billion at the midpoint of its guidance, up 230% year over year. Management's commentary left no doubt that it was AI driving this train.
As the potential use cases for AI grow, so too do the estimates of the opportunity. Conservative estimates suggest generative AI could be worth $1.3 trillion by 2032, according to data compiled by Bloomberg Intelligence. Cathie Wood, CEO of Ark Investment Management, is much more bullish, estimating the total addressable market for AI could be as high as $37 trillion by 2030. While it's difficult to pin down the exact size of the opportunity, it's sure to be substantial -- and Nvidia's processors provide the technology that makes it all possible.
The undisputed leader in the field
There are other reasons to believe Nvidia stock will only go higher from here. The company controls an estimated 95% of the data center market, according to CFRA Research analyst Angelo Zino. The data center market is expected to rise from $263 billion in 2022 to $603 billion by 2030, according to Prescient and Strategic Intelligence Market Research. As the leader in the space, Nvidia will ride that tailwind higher.
The company also dominates the field of machine learning -- an established branch of AI. Nvidia has a market share estimated at 95%, according to data compiled by New Street Research.
This helps illustrate the inexorable ties between data centers and AI -- and Nvidia is the clear choice in both. As companies continue to adopt generative AI, there's every indication that Nvidia processors will continue to be the industry standard.
Price is what you pay; value is what you get
There's the hotly contested subject of valuation to be considered. Using the most commonly employed metrics, Nvidia is selling for 96 times earnings and 40 times sales (as of this writing), which is enough to make value investors run for cover -- but other metrics tell a different story.
Nvidia has been generating triple-digit growth, which is expected to continue -- at least over the short term. As such, that growth must, of necessity, be factored into its valuation. Enter Nvidia's price/earnings-to-growth (PEG) ratio of less than 1 -- the benchmark for an undervalued stock.
The digital transformation and adoption of AI show no signs of slowing and will likely accelerate from here. Given its market-leading position and surprisingly modest valuation, Nvidia offers a once-in-a-generation opportunity for investors.
