Nvidia: The AI Stock to Buy Amidst the Generative AI Boom
Artificial intelligence (AI) has undeniably made a significant impact on the market in recent years. In fact, some argue that the latest advancements in AI were responsible for sparking the rally in 2023, lifting Wall Street from its bear market doldrums. One particular area of AI that has garnered attention is generative AI, which promises to unleash a wave of increased productivity. While stock market pundits continue to debate its ultimate worth, most estimates place it in the range of $1 trillion and beyond. This massive opportunity has led businesses and investors to scramble for their piece of the pie, although there are those who decry the trend as a bubble or hype.
However, according to Arm Holdings CEO Rene Haas, AI is not just hype. In an interview with Bloomberg Technology, Haas boldly stated, “We believe that AI is the most profound opportunity in our lifetimes, and we’re only at the beginning.” This sentiment is echoed by many other leaders in the tech industry. If Haas is correct, there is one AI stock that stands out among the rest: Nvidia.
Nvidia’s rise to dominance in the technology industry is a testament to its innovative approach. The company first made waves by pioneering the modern graphics processing unit (GPU), revolutionizing the rendering of lifelike images in video games. This breakthrough was made possible by parallel processing, a technology that breaks down complex mathematical processing jobs into manageable bits and runs them simultaneously. Recognizing the broader applications of this technology, Nvidia pivoted to apply it to earlier versions of AI, cloud computing, data centers, self-driving technology, and more.
Nvidia’s early lead in machine learning, a branch of AI, has positioned it as a dominant player in the market, capturing approximately 95% of market share, according to New Street Research. When generative AI emerged, Nvidia was well-prepared to capitalize on the opportunity. The demand for AI primarily comes from cloud infrastructure providers, who make generative AI available to their customers. Nvidia’s impressive list of cloud computing customers includes tech giants such as Amazon Web Services, Microsoft Azure, Google Cloud, and IBM Cloud, as well as Oracle Cloud, Baidu AI Cloud, Alibaba Cloud, and Tencent Cloud. With an estimated 95% market share in GPUs used in the data center market, Nvidia is the go-to choice for speeding data through the ether.
Despite its current dominance, the potential for growth in the AI market is vast and largely untapped. Analysts suggest that AI has ignited an upgrade cycle in the data center industry to meet the computational demands of generative AI. With an installed base worth approximately $1 trillion, Nvidia has a long runway ahead.
One of the key factors that sets Nvidia apart from its competitors is its ability to innovate at a rapid pace. As soon as a rival introduces a processor that comes close to Nvidia’s capabilities, the company is ready with the next generation of its lightning-fast chips. This is made possible by Nvidia’s substantial research and development (R&D) budget, which accounted for 27% of its total revenue in fiscal 2023, amounting to $7.34 billion. In fiscal 2024 alone, Nvidia has already spent $6.2 billion on R&D. This heavy investment has allowed Nvidia to stay ahead of the AI curve, as evidenced by its recent financial results.
In its fiscal 2024 third quarter, Nvidia reported record revenue of $18.1 billion, a staggering 206% increase year over year. Diluted earnings per share also soared by 1,274% to $3.71. Despite concerns about Nvidia’s lofty valuation, selling at 92 times earnings and 39 times sales, these figures fail to consider the company’s triple-digit growth, which management expects to continue. When considering the more appropriate price/earnings-to-growth (PEG) ratio, Nvidia’s valuation appears to be less than 1, indicating an undervalued stock.
Given Nvidia’s industry-leading position, track record of growth, and surprisingly modest valuation, it is no wonder that many investors view it as the AI stock to buy amidst the generative AI boom. As AI continues to shape the future, Nvidia is well-positioned to capitalize on this profound opportunity.
