Demand for artificial intelligence (AI) infrastructure, software, and services is about to reach a huge inflection point. This could be the biggest growth market in history, especially when it comes to business adoption.
According to a recent survey by global consultancy McKinsey & Co., around 40% of businesses reported that they would increase investments in AI due to advancements in generative AI alone. That should be huge news because, according to new research from The Motley Fool, fewer than 10% of businesses nationwide currently use AI. So, in the coming years, we could see AI adoption by businesses rise nearly fivefold.
If you want to profit from the AI revolution, there's one stock in particular you should add to your portfolio.
NASDAQ: NVDA
Key Data Points
This is my favorite AI stock
Most investors following the AI craze are already familiar with Nvidia (NVDA 1.56%). Even after a recent correction, Nvidia remains one of the most valuable companies in the world, with a market cap of $2.7 trillion dollars. Investors who have followed the company are likely aware of a few things.
First, Nvidia's main business line is producing graphics processing units (GPUs). GPUs make much of our modern technology possible. But the most exciting use case right now is with machine learning. Machine learning is a critical process for training and running AI models. Without it, the current AI revolution wouldn't be taking place. And which company makes the best GPUs right now for machine learning? You guessed it: Nvidia.
By most estimates, Nvidia currently controls between 70% and 95% of the market for GPUs related to AI applications. If previous chip wars are any indication, this market share will fluctuate over time, perhaps even shrinking due to mounting competition. But for now, Nvidia's chips are arguably the best for AI applications. The company's leading gross margins (in the mid-seventies percentage-wise) are a strong testament to this, given that customers are willing to pay considerably more for Nvidia's products versus the competition.
But this brings us to the secret weapon Nvidia possesses that many investors are unaware of: the CUDA advantage.
CUDA stands for Compute Unified Device Architecture. It's essentially a developer suite that allows end users to customize chip performance for particular applications. In use since 2006, CUDA has created a high level of vendor lock-in over time. Today, CUDA is widely viewed as the standard for GPU acceleration.
This means that much of today's AI ecosystem is built in parallel with CUDA, creating a level of "stickiness" that other GPU makers don't have. In a nutshell, Nvidia now controls both the hardware and the software end of the spectrum, giving it a huge competitive advantage beyond how well its raw chips perform.
Nvidia currently has the lead in terms of GPU performance. But the CUDA advantage could help sustain this lead for far longer than previous chip cycles. But does all of this make the stock a buy right now?
Should you add Nvidia to your portfolio right now?
High-growth stocks typically have a lot of volatility because so much of their value is tied to the multiple the market assigns them. Small shifts in sentiment can send these multiples sharply higher or lower, creating an outsize effect on the stock price.
NVDA PS Ratio data by YCharts. PS Ratio = price-to-sales ratio. TTM = trailing 12 months.
After the recent pullback, Nvidia shares are cheaper than they have been in months. Still, on paper, shares remain pricey at 22.4 times sales. That's a hefty premium versus slower-growing peers like Advanced Micro Devices.
But the AI revolution should continue to mature over the next several decades. And Nvidia's CUDA advantage means it will be at the center of this growth for some time. With enough patience, the company's rapid underlying growth rates could eventually make shares look like a bargain at 22.4 times sales. This requires a multi-decade holding period for the biggest gains, but that's something both millennial investors and younger generations can afford to commit to.
Nvidia is an incredible stock, but it's expensive. However, that shouldn't be a problem for younger investors who have the luxury of long investment periods ahead of them. But if you're looking for an investment with more near-term visibility, you might want to look elsewhere, given how volatile Nvidia shares can be.
