Since the launch of ChatGPT more than three years ago, Nvidia (NVDA 1.27%) has gotten more attention than probably any other stock on the market, and for good reason.
Nvidia is the company that is driving the AI revolution and collecting the most value from the AI boom. The company still dominates the market for data center GPUs, the chips used to make AI models that power applications like ChatGPT work, with more than 90% market share. Thanks to AI, it's also now the most valuable company in the world at a market cap of $4.5 trillion, and the stock is up roughly 1,000% over the last three years.
As a semiconductor stock with the vast majority of its business exposed to AI, Nvidia seems like it would be a high-risk stock. After all, it's been volatile over its history. As the chart below shows, the stock has fallen by more than 50% twice in the last ten years, and even fell by 30% last spring when stocks fell over tariff concerns.
However, compared to most of the stock market, Nvidia looks well-prepared to overcome a potential recession or any macroeconomic malaise this year. Here's why.
Image source: Nvidia.
Nvidia's position in the economy
The stock market has soared over the last three years, driven by artificial intelligence, but for everyday Americans, there's a lot to be desired. The labor market has been sluggish for most of the past year. Inflation has sapped buying power, and home prices are out of reach for prospective homebuyers. A wide range of retailers and restaurants have complained about weak consumer spending on recent earnings calls as well.
While there's no clear sign that the economy is headed into a recession, weak job growth and consumer spending can be precursors for an economic downturn.
However, Nvidia, like most of the AI economy, is insulated from those consumer-level challenges. The company counts on hyperscalers, AI start-ups and other large companies to buy its chips, and the infrastructure buildout that's driving that spending is likely to continue as the stakes are higher than just a cyclical downturn.
AI could prove to be a winner-take-all or at least winner-take-most market for many of the use cases in development. Those include the chatbot or LLM battle that seems to have evolved into a three-way race between Alphabet's Gemini, OpenAI, and Anthropic. It's not just hardware that will determine the winner, but having adequate compute power is crucial for these companies to be successful.
The same is true for companies like Tesla and Alphabet that are working on autonomous driving, or any of the companies racing to artificial general intelligence (AGI). Nvidia's products are necessary for the development of all of these new technologies, and demand for its chips continues to outpace supply.
NASDAQ: NVDA
Key Data Points
Jensen Huang's take
Concerns about an AI bubble have rattled Nvidia and its peers at times, but CEO Jensen Huang has given a full-throated defense to those who doubt the AI revolution. In Nvidia's recent earnings call, Huang argued that AI was instead at a tipping point, and that the impact of it was beginning to be felt.
At the World Economic Forum in Davos, Switzerland this week, he called AI, "The largest infrastructure buildout in human history," which will lead to innovations and breakthroughs across industries from financial services to healthcare to robotics.
The momentum in the AI sector could eventually change, and gap a between valuation and fundamentals, generally referred to as a bubble, could develop, but that seems unlikely to happen this year.
In the meantime, investors looking to avoid the macroeconomic pressure that is roiling retailers, restaurants and more traditional cyclical stocks can find refuge in a surprising place: with the AI chip leader, Nvidia.
