When it comes to artificial intelligence (AI), the "Magnificent Seven" -- Microsoft, Apple, Alphabet, Amazon, Meta Platforms, Tesla, and Nvidia (NVDA 6.18%) -- garner the most attention from Wall Street.
Each of these companies is playing a major role in rapid changes across e-commerce, cloud computing, consumer electronics, robotics, advertising, and more. But among the Magnificent Seven, Nvidia may be playing the most important role. The company's graphics processing units (GPU) are fueling applications across the generative AI spectrum -- from machine learning and quantum computing to data centers.
During its fiscal 2024 fourth-quarter earnings call on Feb. 21, Nvidia CEO Jensen Huang declared that "accelerated computing and generative AI have hit the tipping point." With Nvidia stock up over 230% in the last year, some investors may be wondering what Huang meant, and if it's too late to buy shares.
Let's dig into Nvidia's earnings report and assess the secular trends fueling demand for generative AI GPUs. While Nvidia stock is certainly enjoying the moment, investors may still come away inspired to buy shares now.
Nvidia's business is soaring
Oftentimes when a company is experiencing unprecedented demand, it will see soaring revenue -- and that's it. In other words, companies sometimes have to reinvest heavily into manufacturing in order to meet that higher demand. This can put a strain on operating margins and profits, even during times of accelerated sales growth.
But Nvidia is a rare breed, make no mistake about it.
NVDA Revenue (Quarterly) data by YCharts.
The chart above illustrates Nvidia's revenue, gross profit, net income, and free cash flow on a quarterly basis over the last 10 years. Just look at how steep the slope of each line has become. Not only is the company generating robust top-line growth, but its profits and cash flows are growing in lockstep.
Taking this a step further, Nvidia is not resting on its laurels. While demand for its industry-leading A100 and H100 GPUs remains strong, the company is investing its profits relentlessly into product innovation. The company is on track to begin shipments of next-generation chips, including the H200 in the second quarter. Moreover, reports suggest that Nvidia plans to release its most powerful chip to date, the B100, later in 2024.
The above trends underscore the fact that Nvidia's chips are in high demand. And with newer, improved models expected to reach customers soon, Nvidia's ride could just be getting started.
Image Source: Getty Images
The AI revolution is just getting started
As use cases for AI continue to evolve, so do estimates about the total market size for the technology. A top Nvidia manager recently forecast that the market for AI-powered chips and software would grow to be worth $600 billion. The jury is still out on whether that prediction will prove accurate. However, what analysts are calling for in terms of growth can shed some light on Nvidia's potential.
NVDA Revenue (TTM) data by YCharts.
While Nvidia's trailing-12-month revenue of $61 billion is impressive, perhaps even more encouraging are its long-term growth prospects as estimated by Wall Street analysts. Given Nvidia's status as a market leader in AI GPUs, many clearly believe that the current demand trends can be sustained over the next few years.
Is it too late to buy Nvidia stock?
To me, the biggest risk associated with Nvidia is not its valuation. Rather, I think the competitive landscape is going to become increasingly intense. Nvidia's top rival at the moment is Advanced Micro Devices (AMD). However, both Amazon and Microsoft are already developing their own inference and training chips for generative AI models. While Nvidia may have a head start, investors should not turn their backs on its big tech cohorts. While I suspect it'll take a few years for other chips to acquire meaningful market share, Nvidia investors should be considering what other growth drivers the company has beyond AI GPUs.
One area that investors may be overlooking at the moment is Nvidia's opportunity in software. While the company is still primarily a hardware developer, Nvidia's software and services business reached a $1 billion revenue run rate during the fourth quarter.
This is a big deal for a couple of reasons. First, software tends to come with high margins. Should Nvidia begin to eventually lose share in the chip market, it's likely that its margins will take a hit. However, this could be more than offset if Nvidia continues to see success in software. Additionally, since software services are typically more predictable in terms of demand, I wouldn't be surprised to see investors apply even more of a premium to Nvidia stock in the future.
At a price-to-sales ratio of 32, Nvidia stock is trading much higher than its historical levels. However, the company's soaring revenue and profits, coupled with its steadfast reinvestment into new products and its budding software business, could warrant the premium. Given its differentiated business model, full-spectrum platform, and the secular tailwinds fueling AI, I think now is as good a time as ever to scoop up shares of Nvidia and hold them for the long run.
