Nvidia CEO says AI is at a ‘tipping point’. Is the stock still a buy?

By | March 4, 2024

When it comes to artificial intelligence (AI), the ‘Magnificent Seven’ are – Microsoft, Apple, Alphabet, Amazon, Metaplatforms, TeslaAnd Nvidia (NASDAQ: NVDA) — getting most of the attention from Wall Street.

Each of these companies plays an important role in the rapid changes in e-commerce, cloud computing, consumer electronics, robotics, advertising and more. But among the Magnificent Seven, Nvidia perhaps plays the most important role. The company’s graphics processing units (GPU) power applications across the generative AI spectrum – from machine learning and quantum computing to data centers.

During the company’s Q4 2024 earnings call on February 21, Nvidia CEO Jensen Huang stated that “accelerated computing and generative AI have reached the tipping point.” With Nvidia shares up over 230% in the past year, some investors may be wondering what Huang meant and whether it’s too late to buy shares.

Let’s take a look at Nvidia’s earnings report and assess the secular trends driving demand for generative AI GPUs. While Nvidia stock is certainly enjoying the moment, investors may still be inspired to buy shares now.

Nvidia’s activities are growing enormously

When a company experiences unprecedented demand, it will often see an increase in sales – and that’s it. In other words: companies sometimes have to reinvest heavily in production to meet that higher demand. This can put pressure on operating margins and profits, even in times of accelerated revenue growth.

But Nvidia is a rare breed, make no mistake.

NVDA revenue (quarterly) graph

The chart above illustrates Nvidia’s quarterly revenue, gross profit, net profit, and free cash flow over the past 10 years. Just look at how steep the slope of each line has become. Not only is the company generating robust revenue growth, but its profits and cash flows are also growing at a rapid pace.

Taking things a step further, Nvidia is not resting on its laurels. While demand for the industry-leading A100 and H100 GPUs remains high, the company continuously invests its profits in product innovation. The company is on track to begin shipping next-generation chips, including the H200, in the second quarter. Furthermore, reports suggest that Nvidia plans to release its most powerful chip yet, the B100, later in 2024.

The above trends underline the fact that Nvidia’s chips are in high demand. And with newer, improved models expected to reach customers soon, Nvidia’s ride could be just beginning.

An AI GPU chip on a printed circuit board.An AI GPU chip on a printed circuit board.

Image source: Getty Images

The AI ​​revolution has only just begun

As use cases for AI continue to evolve, so too do estimates of the overall market size for the technology. A top Nvidia executive recently predicted that the market for AI-powered chips and software would grow to a value of $600 billion. The jury is still out on whether this prediction will prove correct. However, what analysts are calling for in terms of growth could shed some light on Nvidia’s potential.

NVDA Revenue Chart (TTM).NVDA Revenue Chart (TTM).

While Nvidia’s trailing-twelve-month revenue of $61 billion is impressive, its long-term growth prospects may be even more encouraging, as estimated by Wall Street analysts. Given Nvidia’s status as the market leader in AI GPUs, many are clearly confident that current demand trends can be sustained in the coming years.

Is it too late to buy Nvidia stock?

To me, Nvidia’s biggest risk isn’t its valuation. Rather, I think the competitive landscape will become increasingly intense. Nvidia’s biggest rival at the moment is Advanced micro devices (AMD). However, both Amazon and Microsoft are already developing their own inference and training chips for generative AI models. While Nvidia may have an edge, investors shouldn’t turn their backs on its major tech cohorts. While I suspect it will take a few years for other chips to gain meaningful market share, Nvidia investors should consider what other growth drivers the company has besides AI GPUs.

One area that investors may be overlooking right now is Nvidia’s capabilities in software. While the company is still primarily a hardware developer, Nvidia’s software and services business reached $1 billion in revenue in the fourth quarter.

This is a big problem for a number of reasons. First, software typically has high margins. If Nvidia ultimately loses market share in the chip market, margins will likely take a hit. However, this could be more than offset if Nvidia continues to see success in software. Furthermore, because software services tend to be more predictable in terms of demand, I wouldn’t be surprised if investors apply even more of a premium to Nvidia stock in the future.

With a price-to-sales ratio of 32, Nvidia shares are trading much higher than their historical levels. However, the company’s rising sales and profits, coupled with its steadfast reinvestment in new products and burgeoning software business, could justify this premium. Given its differentiated business model, full spectrum platform, and the secular tailwinds that AI is fueling, I think now is a good time to pick up Nvidia stock and hold it for the long term.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Nvidia CEO says AI is at a ‘tipping point’. Is the stock still a buy? was originally published by The Motley Fool

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