Nvidia (NVDA 3.01%) is largely viewed by investors as a graphics processing unit (GPU) stock. That is, the company primarily manufactures, markets, and sells GPUs: specialized electronic circuits that make everything from modern gaming to image rendering possible.
And while GPUs are critical components for a wide variety of industries, only one industry really matters for Nvidia and its investors right now: artificial intelligence (AI). Of course, Nvidia has been perhaps the most popular AI stock globally over the last few years. But as the number discussed below proves, this is no longer just a growth opportunity for the company. Nvidia's future will nearly completely rely on what happens to its AI infrastructure business.
Image source: Nvidia.
AI is now the only thing that matters for Nvidia investors
Right now, the world is experiencing an unprecedented growth in data center construction. Data centers, at least for now, use a lot of energy. That's why we're also seeing sizable interest in new energy technologies like small modular nuclear reactors. But what data centers need just as much as energy are GPUs. Nvidia's GPUs are largely considered the best on the market. That's why data center and cloud infrastructure operators are scrambling to buy as many Nvidia chips as possible.
Historically, Nvidia's GPU revenue has come from a variety of sources. But last quarter, $62.3 billion of its $68.1 billion in total revenue came from data center customers. And while these data centers also serve a variety of end markets, there's no doubt among experts as to what is causing their rapid expansion: AI.
"As technology companies race to develop cutting-edge artificial intelligence (AI) models, data centers have become some of the most important infrastructure in the world," concludes a recent Goldman Sachs report. "Over the next five to six years, we forecast substantial demand growth in the global data center market."
NASDAQ: NVDA
Key Data Points
So while the market has long viewed Nvidia as a beneficiary of AI, that is no longer the entire story. Almost all of Nvidia's revenue now comes solely from data center customers, which are scrambling to scale up due to rapidly rising demand from AI. In a nutshell, Nvidia's investment thesis is now centered almost entirely on AI. And it's not just centered on growth in AI applications and services. The company's future will hinge specifically on the continued buildout of data centers designed to meet the needs of these data centers' AI customers.
While most experts are predicting a huge surge in data center construction, there is no guarantee that the buildout will fully meet expectations. In fact, a recent Goldman Sachs report recently outlined several potential scenarios where AI adoption falls short, resulting in excess supply of data centers. Growth will still occur, the firm predicts, but it may come in lower than expected -- a direct blow to investors who buy at a price point that already prices in this unrealized growth.
Nvidia is still a very promising business in the long term. But an investment today completely hinges on the pace and scale of the global data center buildout to make sense.
