Search for the phrase "hot AI stocks" using your favorite search engine, and you'll no doubt see Nvidia (NVDA +2.59%) mentioned -- and for good reason. Shares of the giant chipmaker have skyrocketed close to 240% over the last 12 months.
Demand for Nvidia's graphics processing units (GPUs) is going through the roof. Companies around the world are scrambling to build AI applications, and the company's GPUs are the gold standard to power those apps.
But Nvidia is no longer just focused on chips. It now has a new $1 billion business.
NASDAQ: NVDA
Key Data Points
An "operating system for artificial intelligence"
Nvidia CFO Colette Kress stated during the fourth-quarter earnings conference call that the company's software and services business achieved an annualized revenue run rate of $1 billion in the fourth quarter of 2023. Nvidia AI Enterprise stands at the center of the company's software focus.
CEO Jensen Huang described Nvidia AI Enterprise as "an operating system for artificial intelligence." He emphasized, "Software is fundamentally necessary for accelerated computing."
Nvidia's customer base includes quite a few huge technology companies with large software development teams. Why would they depend on Nvidia for software instead of building their own?
Huang said that despite these customers' scale, they still don't have the resources needed to handle the complexity involved with maintaining and fine-tuning their software stacks across all of their AI applications. He added that Nvidia will do it for them.
Huang isn't exaggerating. Nvidia AI Enterprise serves as the software layer for the company's DGX Cloud AI supercomputing service. DGX Cloud customers include Amazon's AWS, Microsoft Azure, Alphabet's Google Cloud, and Oracle Cloud.
Early innings
Nvidia is still only in the early innings of building its software business. Huang said in the Q4 call, "We're off to a great start." He added, "[W]e're really just getting started."
He believes that software will be a much larger business for Nvidia over time. But just how big might Nvidia's software business grow?
Huang said his "guess is that every enterprise in the world, every software enterprise company that are [sic] deploying software in all the clouds and private clouds and on-prem [on-premises], will run on Nvidia AI Enterprise, especially obviously for our GPUs." With Nvidia charging $4,500 per GPU per year for AI Enterprise, that would translate to a massive amount of recurring revenue.
I'm not sure if that grand vision will be achieved. However, I have no doubt whatsoever that software and services revenue of $1 billion is only the tip of the iceberg.
Icing on the cake
This huge software opportunity isn't the main reason to consider investing in Nvidia, though. Software will likely continue to be the icing on the cake for the company's chip business, which accounted for most of Nvidia's nearly $61 billion in revenue last year.
The company's chip business should still have significant growth potential. Huang identified two key growth drivers for Nvidia that should extend into 2025 and beyond.
One is the ongoing transition from general computing to accelerated computing. He believes that the energy efficiency and speed offered by accelerated computing will entice organizations to convert all of their data centers over time.
The other major tailwind is generative AI. Companies in nearly every industry are building generative AI apps. Huang said that Nvidia has seen generative AI become "a whole new way of doing computing" that's driving the company's growth in a big way.
With these key trends plus a booming software business, Nvidia just might remain on the list of hot AI stocks for a long time to come.
