Nvidia has performed amazingly over the past year. Since the start of 2023, it has risen an amazing 520%. However, that's not surprising for a cyclical company like Nvidia.
Nvidia sells a product once and then must sell another to continue driving sales. This can lead to a boom-or-bust environment. While this has worked for many companies for hundreds of years, it's not as repeatable as a subscription model.
So if you're looking for stocks for the long term, consider these three that are riding the same wave as Nvidia.
Subscription businesses are better over the long term
Some of Nvidia's largest customers are those who own data centers used for cloud computing. Cloud computing is used by many companies that don't wish to maintain computing resources within the company. It involves renting computing power from cloud computing providers, which converts large upfront capital costs into recurring expenses. This is smart, as it keeps a business's capital light, allows it to scale easily, and doesn't come with the risk of buying technology that could be obsolete in a few years.
The largest cloud computing providers are Amazon (AMZN 0.75%), Microsoft (MSFT -1.00%), and Alphabet (GOOG -3.33%) (GOOGL -3.37%), and they are massive buyers of Nvidia's primary product: graphics processing units (GPUs). Amazon, Microsoft, and Alphabet build massive data centers with computing power for their cloud computing clients. GPUs provide a lot of computing power in these data centers, as they can be utilized to crunch data, run engineering simulations, and train artificial intelligence (AI) models.
The use of GPUs for AI has recently sparked a lot of interest, as many companies are racing to develop and implement their AI models. This has caused a demand spike for Nvidia (for its GPUs) and the cloud computing providers (their easily rentable resources). The primary difference here is that Nvidia may sell its GPUs to one of the cloud computing providers or another end-user, but that's it. Amazon, Microsoft, and Alphabet charge their customers a monthly fee to utilize their resources.
This is key, as Nvidia has to hope the demand for its products keeps up; otherwise, its business could come crashing down. While I'm not saying that will happen soon for Nvidia, it has tended to get wrapped up in various bubbles (most recently, the cryptocurrency bust in 2018 and 2021) and end up with a vast supply of unwanted GPUs. This may happen again for AI-centric GPUs, or it may not.
As an illustration of Nvidia's cyclical nature, take a look at this graph, which shows how far its quarterly revenue declined from a previous high. (Note: The end value in the chart is 0% because they are currently all at their highest quarterly revenue of all time).
NVDA Revenue (Quarterly) data by YCharts
Because Nvidia is prone to rising and falling demand, its revenue drops from its highs are much larger than those of Amazon, Microsoft, or Alphabet.
Regardless, it's much less certain than cloud computing, which is expected to massively grow. Grand View Research issued a report that stated the cloud computing market size was around $484 billion in 2022. But it expects it to massively increase to $1.55 trillion by 2030. That's a huge growing industry, and Amazon, Microsoft, and Alphabet are all set to capitalize on the growth.
Still, Nvidia will benefit from the buildout of data centers to run cloud computing. But once that initial sale is complete, the company will lose out on further revenue.
If you're curious about why subscriptions are better than one-time purchases, just look at the software industry.
Software companies have already converted to subscription models
Software companies figured out about a decade ago that locking clients into a subscription service is a much better business model. Clients have to make a painful choice if they break the subscription, as they'll lose access to the software altogether. Before this, customers could choose to upgrade to the newest software edition, which may include some new features. But it wasn't always required.
Now, nearly all software is subscription-based, and even basic products like Microsoft's Office suite have a subscription offering. Clearly, this business model has some advantages over a single sale.
While Nvidia may be fine, I'm more confident in Amazon, Microsoft, and Alphabet's ability to sustain their businesses over the long term due to their cloud computing segments. While these aren't the largest parts of their businesses, they are critical components that will provide consistent subscription revenue.
