A recently announced $100 billion agreement between ChatGPT developer OpenAI and artificial intelligence (AI) leader Nvidia (NVDA 1.07%) shook up the markets. That deal came just after database software and technology company Oracle told investors it expects cloud infrastructure revenue growth to soar over the next several years.
Things are moving quickly in the AI infrastructure space. Here's what investors need to know to take advantage of the ongoing expansion.
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The heart of AI infrastructure
The strategic partnership between Nvidia and OpenAI is telling for the AI sector. The intent is to deploy at least 10 gigawatts of Nvidia systems to help OpenAI build sector-leading models and tools for developers and to expand uses for the AI experience. For perspective on the amount of computing power that represents, consider that a typical nuclear power plant has a power output of about 1 gigawatt.
The partnership complements the relationships Nvidia has with notable global tech companies like SoftBank, Microsoft, and Oracle. Data center construction announcements across the technology sector have Wall Street believing the demand for the chipmaker's products is insatiable. In a recent research note shared by Barron's, for example, Dave Novosel, an analyst at credit-researcher Gimme Credit, wrote:
Firstly, Nvidia is the clear leader among chip providers, at least for the time being. Secondly, we expect robust demand for AI for the foreseeable future. AI is being employed by virtually every major company. And firms are finding more and more uses for AI in their operations, primarily because of the massive cost savings attained.
That line of thought has Nvidia stock holding up well even as other AI-related names pulled back in recent weeks.
Be aware of the risks
Some say the company's investment in OpenAI is a kind of circular deal since the money is seemingly being recycled into buying Nvidia products. That could bring into question whether the AI spending boom is sustainable.
But the big tech hyperscalers and foreign entities also continue to announce multibillion-dollar projects that will undoubtedly benefit the chipmaker directly. Microsoft has an AI data center in the works in Wisconsin. It also made a mid-September announcement detailing plans for a $30 billion investment in AI infrastructure and related operations in the United Kingdom over four years.
Meta Platforms is building a $10 billion data center in Louisiana dubbed Hyperion. Another project called Prometheus is for a smaller facility in Ohio. The large Stargate joint venture among SoftBank, OpenAI, and Oracle plans to spend $500 billion building AI infrastructure in the U.S. There have also been several international projects announced by sovereign governments.
An Nvidia investment has a risk buffer
There is the risk that these capital spending plans get pulled back or downscaled. But a good result from an investment in Nvidia isn't fully reliant on all of those plans panning out. It isn't a story stock in the sense that a successful investment outcome is based on future potential rather than current fundamentals.
It's already a very profitable company, and not just from its data center segment. It has growth engines elsewhere. Revenue from its gaming business also soared 49% year over year in the most recent fiscal quarter. Its automotive and robotics segment experienced revenue growth of 69% versus the year-ago period.
While the automotive and robotics business generates much lower revenue than either data center or gaming, CEO Jensen Huang sees enormous potential there. Earlier this year, he told investors that he sees a multitrillion-dollar opportunity in autonomous vehicles and humanoid robots.
The chipmaker's stock is trading at a relatively high valuation largely based on expectations for continued strong sales growth in the data center business. Its forward price-to-earnings ratio is about 40. That's more than 15% above the three-year average, but well off the high. Even if some expected capital spending doesn't materialize, the AI race is well underway, and Nvidia will continue to benefit.
