Are you green with envy about Nvidia stock? If so, it is not too late to buy.
How so? After soaring 26% on May 25 to a record high, this designer of semiconductors for gaming, data centers, and artificial intelligence, has a market capitalization of $952 billion in the wake of an optimistic revenue forecast for the current quarter.
After years of hype, generative AI is becoming the biggest thing since the iPhone. As software companies build large language models to compete for the attention of consumers, demand for Santa Clara, Calif.-based Nvidia chips likely will continue to explode — regardless of who wins the AI wars that Microsoft, Google, Meta Networks, Amazon and others are fighting.
Another winner in the AI picks-and-shovels supplier play is Taiwan Semiconductor Manufacturing — the company that manufactures Nvidia’s AI chips.
In November 2021, I called Nvidia stock a buy after it had enjoyed a 35% average annual increase in its stock price since its 1999 IPO. Since then, the shares are up 30%.
Stocks rise because companies exceed investor expectations. Nvidia is likely to keep doing that.
Nvidia’s First Quarter Report
Nvidia designs semiconductors for gaming, data centers, and automotive vehicles industries — while outsourcing their manufacturing.
Revenue fell less than expected in its fiscal 2024 first quarter. which ended in April. Nvidia stock is soaring on its forecast for explosive Q2 revenue growth driven by demand for AI chips.
According to CNBC, here are the highlights:
- Q1 Revenue: $7.19 billion — down 13% from $8.29 billion a year ago — was $670 million more than the Refinitiv consensus.
- Q1 adjusted earnings per share: $1.09 — 17 cents more than expected.
- Q2 revenue forecast: $11 billion (plus or minus 2%) — 54% above estimates.
Most of its revenue growth came from selling chips to data centers. Here is the revenue breakout by division:
- Data center revenue rose 14% to $4.28 billion — $380 million more than forecast driven by “demand for its GPU chips from cloud vendors as well as large consumer internet companies, which use Nvidia chips to train and deploy generative AI applications like OpenAI’s ChatGPT,” noted CNBC.
- Gaming revenue fell 38% to $2.24 billion — $260 million above estimates due to macroeconomic headwinds and ramp up of Nvidia’s latest gaming graphics processing unit (GPU) chips .
- Automotive revenue soared 114% to $300 million (4% of total Q1 revenue).
AI Industry Explosion Driving Chip Demand
It was not the miners who made out the best during the gold rush; it was their pick, shovel and blue jean suppliers.
Today, the gold miners are the builders of large language AI models (LLMs). The picks and shovel makers are the companies that design and build the semiconductors that power the computer hardware that trains and operates the LLMs on behalf of hundreds of millions of end users.
LLM developers fuel chip demand
LLM developers include Microsoft, Google, and Meta Platforms. OpenAI’s ChatGPT “has spurred an arms race between tech giants to offer advanced AI features to their customers,” according to the Wall Street Journal.
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To be sure, AI has long been plagued by high expectations that were not realized. I experienced this in a startup launched decades ago that aimed to use expert systems to supply personal financial planning services. Sadly, the value of this technology for personal financial planners was not worth the cost of the AI.
Nevertheless, as I wrote in April, generative AI ended 2022 as a nearly $11 billion market and it’s expected to grow at a 31% compound average annual rate to $152 billion in 2032.
This could be a bonanza for Microsoft, which invested $13 billion in OpenAI. I estimated that ChatGPT could contribute between $30 billion and $40 billion to Microsoft’s revenue — representing a 10% to 20% increase over the tech company’s 2022 revenue.
Nvidia has a head start over AI chip rivals
High demand for AI chips is only a business opportunity if the supplier can meet the demand. To do that, a company must be able to build, ship, and service the product.
Nvidia is prepared to supply those AI chips. As Nvidia CFO Colette Kress told investors on the earnings call, “This demand has extended our data center visibility out a few quarters and we have procured substantially higher supply for the second half of the year.”
Nvidia sees AI as the biggest thing since Apple introduced the iPhone in 2007. CEO Jensen Huang told the Journal, “All the technology came together and helped everybody realize what an amazing product that can be and what capabilities it can have.”
Meanwhile, operators of big data centers are retooling their computing infrastructure to capture AI’s growth opportunities. “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process,” Huang told the Journal.
How High Can Nvidia Stock Rise?
After Nvidia’s boffo revenue forecast, analysts are scrambling to raise their price targets from $375 to $500 —which represents 64% upside, according to Benzinga.
Reality trains investors to be a bit cautious about such bullish predictions. When I wrote about Nvidia back in November 2021, I turned out to be very wrong about the Metaverse — then at the white-hot center of its hype cycle — becoming the force that would propel demand for Nvidia chips.
Back then, Facebook expected to increase its 2022 capital expenditures on the metaverse by 66% to some $32 billion — representing $10 billion in new addressable market opportunity for Nvidia. But Mark Zuckerberg’s metaverse vision proved to be a nightmare.
Nevertheless, I see a compelling bull case for Nvidia profiting from generative AI. Geoff Blaber, chief executive of tech consultancy CCS Insight, told the Financial Times, chips and related software tools are the picks and shovels of a generational shift in AI. Blaber said Nvidia leads the AI chip industry due to its “comprehensive toolchain that no other company” can match.
Since Nvidia told investors its second quarter revenue would top $11 billion, it would be inviting shareholder lawsuits were it not confident that it could achieve that result — and most likely expects to exceed it.
As Kress told MarketWatch, “The inflection point of AI is here. It’s put us in a spotlight that we understood would happen. The inflection on AI and accelerated computing is here.”
Nvidia’s formidable competitive advantage in generative AI has been building for 15 years. As the Financial Times reported, Huang told analysts on May 24 that 15 years of investment and expanding production capability left Nvidia in the right place at the right time when ChatGPT set off an even bigger investment cycle by the world’s richest companies.
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