Major technology companies have ramped up their capital spending significantly since 2023. They have been spending big-time on putting artificial intelligence (AI) infrastructure in place in a bid to make the most of this fast-growing technology.
According to Bloomberg Intelligence, Amazon, Microsoft, Alphabet, Meta Platforms, Apple, and Oracle spent a total of $110.2 billion in capital expenditures (capex) last year, up from $104.2 billion in 2022. However, these big tech companies are on track to spend an estimated $165.2 billion in capex this year, which would be a big increase of almost 50% from 2023 levels.
What's more, these tech giants are expected to spend almost $200 billion in capex in 2025, thanks to their focus on expanding their data centers to meet the growing demand for AI applications. Bloomberg points out that the majority of this spending will be allocated to graphics processing units (GPUs) and other data center infrastructure.
GPU maker, Nvidia (NVDA +5.93%), is in a terrific position to capitalize on this massive capital spending by big tech companies.
NASDAQ: NVDA
Key Data Points
Nvidia has cornered the lion's share of big tech capital spending
The big technology companies mentioned above have been spending heavily on AI data centers, and Nvidia has been a big beneficiary of their spending. The GPUs that Nvidia manufactures have witnessed a huge surge in demand because of their ability to train large language models (LLMs), and they are now being deployed for inference applications as well.
This explains why the company's data center revenue shot up a remarkable 217% in fiscal 2024 (which ended in January this year) to $47.5 billion. Nvidia's data center revenue in the first half of the current fiscal year has already reached $49 billion, of which $42 billion can be attributed to sales of AI GPUs. At this pace, Nvidia's data center GPU revenue could hit $84 billion this year.
This suggests that Nvidia is hypothetically on track to account for just over half of the entire capex of the big tech companies discussed above. Of course, Nvidia supplies its AI GPUs to other companies and governments as well, so all of its data center GPU revenue isn't coming from sales of AI chips to big tech players.
However, it is worth noting that the major technology companies at the center of the discussion in this article have been queuing up to buy Nvidia's GPUs. As it turns out, the demand for the chipmaker's next-generation Blackwell graphics cards is so strong that they have been reportedly sold out for the next 12 months.
That's not surprising; Nvidia pointed out earlier this year that "among the many organizations expected to adopt Blackwell are Amazon Web Services, Dell Technologies, Google, Meta, Microsoft, OpenAI, Oracle, Tesla and xAI." As a result, there is a solid chance that Nvidia will continue to benefit from a surge in big tech's capex next year, especially considering that it is expected to maintain its robust share of the fast-growing AI chip market.
In an interview with CNBC, Bank of America analyst Vivek Arya pointed out that Nvidia is on track to maintain its impressive share of 80% to 85% of the AI chip market, suggesting that it could indeed receive a nice chunk of the $200 billion big tech capex. According to reports, investment bank Mizuho estimates that the AI GPU market could hit an annual size of $400 billion over the next five years, indicating that Nvidia's outstanding data center growth is here to stay.
This explains why analysts are expecting Nvidia's revenue to increase at an annual rate of 57% for the next five years, which is why buying this stock right now looks like the right thing to do considering its valuation.
Investors are getting a good deal on the stock right now
Though Nvidia stock's trailing price-to-earnings (P/E) ratio of 65 is expensive, the forward earnings multiple of 36 points toward a big jump in its earnings. More importantly, Nvidia's forward P/E isn't all that expensive when we consider that the Nasdaq-100 index has a forward earnings multiple of almost 30 (using the index as a proxy for tech stocks since it has a heavy concentration of tech companies).
The company reported $1.19 per share in earnings in fiscal 2024, and the following chart suggests that its earnings are set to grow at a healthy pace in the current fiscal year and in the next one.
NVDA EPS Estimates for Current Fiscal Year data by YCharts.
According to Yahoo Finance, Nvidia's (PEG ratio) sits around 1.1. This indicates the stock may be fairly valued. The PEG ratio is a forward-looking valuation metric that takes into account a company's earnings growth potential, and a reading of around 1 indicates that a stock is accurately priced for the growth it is expected to deliver.
Another thing worth noting here is that Nvidia's PEG ratio is lower than the S&P 500 Information Technology sector's average PEG ratio of 1.39 in June this year. Since the sector has remained nearly flat since then, it would be safe to assume that the sector has a similar PEG ratio now.
As such, investors looking to buy an AI stock right now should consider loading up on shares of Nvidia as it could deliver another solid performance next year following the 184% gains it has clocked in 2024.
