Artificial intelligence is seen as a transformative technology, leading to an explosion of companies touting AI abilities. Several AI-centric businesses initiated IPOs in recent years as well, such as SoundHound in 2022.
Now, a race is on for leadership in the AI space. For instance, Microsoft CEO Satya Nadella declared that the tech conglomerate will "lead in the AI era, knowing that maximum enterprise value gets created during platform shifts."
Amid this flood of AI-related businesses, it's hard to know which ones will be worthwhile stock investments over the long run. But one leader in the AI space is a no-brainer buy. That company is Nvidia (NVDA +1.23%). Here's what makes the semiconductor giant a buy right now.
NASDAQ: NVDA
Key Data Points
Nvidia's competitive advantages
Over the past year, Nvidia experienced phenomenal sales growth thanks to insatiable demand for its AI-tailored semiconductor chips. For example, in its fiscal first quarter, which ended April 28, Nvidia achieved record revenue of $26 billion, up 262% year over year.
Nvidia is well-positioned to continue capitalizing on this AI demand for years to come. That's because it sits at the nexus of AI technologies. The many companies providing AI solutions all need Nvidia's semiconductor chips, or those of its competitors, to execute AI's complex computations.
What gives Nvidia's products the edge over rivals is that the company realized years ago that its graphics processing units (GPUs), originally designed for video games, could be applied to AI computer programs, called AI models. This gave Nvidia a head start against the competition.
The company continuously evolved its chips to handle increasingly sophisticated AI models. For instance, Nvidia's GPU advances over the past decade led to a 1,000-fold improvement in an AI's ability to correctly make decisions and execute tasks.
The company's latest innovation, the Blackwell platform, was released in May. This new architecture is specifically designed for AI-based computing. According to Nvidia, Blackwell includes the world's most powerful chip, containing over 200 billion transistors.
In addition, Nvidia created its own software platform called the Compute Unified Architecture (CUDA). Customers can use CUDA's digital tools to customize Nvidia GPUs to their needs. This software is pervasive in the tech industry, granting Nvidia yet another competitive advantage.
These kinds of advances add to the company's economic moat and provide Nvidia with a substantial lead over competitors who may never be able to catch up.
Nvidia's leadership
Another factor giving Nvidia an edge is the leadership of CEO Jensen Huang. He sees the dawn of AI as a new Industrial Revolution. Like the one from the 18th century, he sees today's cloud computing data centers put to use manufacturing AI capabilities.
Describing his vision, Mr. Huang stated, "Companies and countries are partnering with Nvdia to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center -- AI factories -- to produce a new commodity: artificial intelligence."
Under Mr. Huang's leadership, Nvidia transformed from GPUs for video games into the leader in semiconductor chips for AI. Now, Nvidia's AI chips are used across industries such as healthcare, automotive, and government. CFO Colette Kress noted, "The importance of AI has caught the attention of every nation."
She expects government sales to grow from zero last year to the single-digit billion-dollar range this year. As a result, Nvidia's fiscal second-quarter outlook estimates revenue of $28 billion, more than double the prior year's $13.5 billion.
More reasons to invest in Nvidia
Nvidia's streak of strong sales has translated into financial strength. The company's Q1 net income was $14.9 billion, an impressive 628% year-over-year increase. This helped Nvidia achieve a jaw-dropping 629% improvement in Q1 diluted earnings per share (EPS) to $5.98 from $0.82 in the prior year.
That's not all. Nvidia attained spectacular free cash flow (FCF) growth. In Q1, FCF hit $14.9 billion, up from $2.6 billion in the previous year. FCF provides insight into the cash available to invest in the business, pay down debt, repurchase shares, and fund dividends. Its FCF growth has recently enabled Nvidia to raise its dividend by 150%.
Nvidia's combination of technological achievements, leadership, and vision has led to outsized revenue and profits. These elements of its success also help Nvidia stay ahead of rivals in the semiconductor industry.
The many factors contributing to Nvidia's achievements are why it's my top AI stock. Given the multi-year growth of the AI market, forecast to surge from $136 billion in 2023 to $827 billion by 2030, Nvidia is a great long-term investment.
The company's stock has dropped from its 52-week high of $140.76, which it reached on June 20. After its 10-for-1 stock split on June 7, Nvidia shares are at a more affordable price, making now a good time to buy.
