As the leading maker of chips for artificial intelligence, Nvidia (NVDA) is the poster child of the AI stock boom. This year, Nvidia stock has surged over 230% on a steady drumbeat of AI technology news, partnerships and customer announcements.
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Nvidia has reported two straight quarters of massive growth in its data center business. Cloud service providers and other enterprises are investing heavily in computing infrastructure to support generative AI. Further, there is an emphasis on Nvidia processors.
But Nvidia stock failed to get a major boost after releasing its fiscal second-quarter results and outlook on Aug. 23. Investors now are debating Nvidia’s valuation after the company tripled in value this year.
Still, Wedbush Securities analyst Daniel Ives said the AI bonanza is looking more like the internet boom circa 1995 than the dot-com bubble, which burst in early 2000.
“Investors now recognize crystal clear this AI demand story is as real as any tech trend we have seen in the last 30 years, comparable only to the internet in 1995 and Apple‘s (AAPL) iPhone launch in 2007,” Ives said in a recent note to clients.
Nvidia Stock Undervalued, Management Implies
As an enabler of artificial intelligence applications, Nvidia is part of the initial wave of AI-related growth, Ives said.
Cloud service providers such as Microsoft (MSFT), Oracle (ORCL) and Salesforce (CRM) should see AI-driven growth as part of the next wave in 12 to 18 months, he said.
Wedbush rates Nvidia stock as outperform with a price target of 600. Meanwhile, shares now are approaching 500.
Company executives signaled a belief that the company is undervalued when they recently announced a $25 billion stock repurchase plan. The stock buyback is open-ended without an expiration date.
For the quarter ended July 30, Nvidia earned an adjusted $2.70 a share on sales of $13.51 billion. Analysts had called for earnings of $2.08 a share on sales of $11.19 billion. On a year-over-year basis, Nvidia earnings rocketed 429% while sales soared 101%.
For the current quarter, Nvidia predicted sales will rise 170% to $16 billion. Wall Street was looking for fiscal third-quarter revenue of $12.59 billion.
On a conference call with analysts, Nvidia Chief Executive Jensen Huang said data centers worldwide are shifting to accelerated computing from general-purpose computing to support generative AI.
$1 Trillion Market Opportunity For Nvidia Stock
“The world has something along the lines of about a trillion dollars’ worth of data centers installed in the cloud and enterprise,” Huang said. “And that trillion dollars of data centers is in the process of transitioning into accelerated computing and generative AI.”
Generative AI can create content — including written articles, images, videos and music — from simple descriptive phrases. It also can write computer programming code. Artificial intelligence systems analyze and digest vast amounts of data to create new works.
Huang estimated that data center operators will spend $250 billion a year on new capital equipment. Further, it will go to update their operations to support AI computing.
Nvidia’s demand visibility extends well into next year and its supply continues to improve, Chief Financial Officer Colette Kress said on the company’s earnings call.
Major cloud service providers Amazon.com (AMZN), Alphabet‘s (GOOGL) Google, Microsoft and Oracle are already deploying Nvidia’s HGX AI supercomputing platform at scale, she said.
Not Just Chips, But The Whole AI Enchilada
What makes Nvidia the clear leader in artificial intelligence technology is the fact that it has built a full AI ecosystem, JPMorgan analyst Harlan Sur said in a recent note to clients.
Nvidia “has positioned itself as the full solutions provider with its portfolio of compute and networking silicon, software and managed cloud services, hardware systems and a full-stack ecosystem for training and deploying complex models,” Sur said. He rates Nvidia stock as overweight, also with a price target of 600.
Raj Joshi, an analyst with Moody’s Investors Service, says Nvidia’s graphics processing units currently own the market.
“There is no meaningful competition for Nvidia’s high-performance GPUs until AMD (AMD) starts shipping its new AI accelerators in high volumes in early 2024,” Joshi said in a note.
Nvidia Stock Investors Underestimate Company’s Lead
And Jefferies analyst Mark Lipacis says Nvidia has the “de facto ecosystem standard for AI.”
“Many investors continue to underestimate the amount of investment Nvidia has poured into its ecosystem, and the lead that has given the company in the market,” Lipacis said in a note. Also, software developers and system builders have embraced Nvidia’s AI platform, creating a virtuous circle for growth, he said.
Nvidia will be the dominant supplier of graphics processing units for AI for the next three to five years, Gene Munster, managing partner with Deepwater Asset Management, predicted in a blog post. Further, Nvidia is likely to “run the table” on the shift to GPUs from central processing units in data centers through at least 2025, he said.
The company’s edge includes software developers using its CUDA platform, he said. CUDA has created “a moat around Nvidia’s chip business,” Munster said. It also would be difficult to get developers to switch to a different platform, he says.
CEO Spells Out Main Advantages
Nvidia CEO Huang outlined the company’s advantages in the AI market on the recent earnings call.
“A new computing era as begun,” he said. “Nvidia has been preparing for this for over two decades and has created a new computing platform that the world’s industries can build upon.”
Nvidia also has the technology architecture, installed base and reach to drive the computing industry change, he said.
“It’s an exciting time for Nvidia, our customers, partners and the entire ecosystem that will drive this generational shift in computing,” Huang said.
Nvidia stock is on four IBD stock lists, including IBD 50, Leaderboard, Big Cap 20 and Tech Leaders. Also, Nvidia stock is up 233% year to date through Tuesday’s close.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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