Artificial intelligence (AI) has undeniably shaped the market trajectory in the past year, with some attributing the 2023 rally to its latest advances. The potential of generative AI is estimated to be in the range of $1 trillion, sparking a frenzy among businesses and investors to tap into this lucrative opportunity. Amid debates of hype and bubble, Arm Holdings CEO Rene Haas boldly declared AI as the “most profound opportunity in our lifetimes,” a sentiment echoed by tech giants around the world.
If Haas is to be believed, then Nvidia (NASDAQ: NVDA) emerges as an enticing stock amidst this AI revolution. As the CEO of Arm makes his proclamation, it’s time to analyze why Nvidia is positioned to thrive in this groundbreaking era.
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Riding the Waves of Innovation
Nvidia’s journey to becoming a dominant force in technology began with pioneering the modern graphics processing unit (GPU), revolutionizing video game graphics. The company’s utilization of parallel processing technology proved pivotal and was later harnessed in AI, cloud computing, data centers, and self-driving technology. With an early lead in machine learning and a market share of approximately 95%, Nvidia was well-prepared for the advent of generative AI.
The surge in AI demand from cloud infrastructure providers solidified Nvidia’s pivotal role, with major tech players such as Amazon Web Services, Microsoft Azure, Alphabet’s Google Cloud, IBM Cloud, Oracle Cloud, Baidu AI Cloud, Alibaba Cloud, and Tencent Cloud, all leveraging Nvidia processors. Holding an estimated 95% share of GPUs in data centers, Nvidia is poised for significant growth as the industry embarks on a trillion-dollar upgrade cycle to accommodate generative AI’s computational demands.
Innovate or Perish
Nvidia’s relentless innovation pace sets an incredibly high bar for its competitors, making it arduous for them to catch up. An unwavering commitment to research and development (R&D), reflected in the allocation of 27% of its total revenue, totaling $7.34 billion in fiscal 2023, has allowed Nvidia to stay ahead of the AI curve. With ongoing heavy investments in R&D, Nvidia’s record-breaking financial results have mirrored its technological strides, recording a 206% surge in revenue and a staggering 1,274% growth in diluted earnings per share in fiscal 2024 third quarter.
Although some investors cite Nvidia’s seemingly high valuation, a deeper analysis suggests otherwise. While the stock trades at 92 times earnings and 39 times sales, its triple-digit growth and a price/earnings-to-growth (PEG) ratio of less than 1 indicate an undervalued stock. Considering its industry-leading position, consistent growth, and compelling valuation, Nvidia stands out as a stock primed for continued investment as the AI revolution unfolds.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Baidu, Microsoft, Nvidia, and Tencent. The Motley Fool has positions in and recommends Alphabet, Amazon, Baidu, Microsoft, Nvidia, Oracle, and Tencent. The Motley Fool recommends Alibaba Group and International Business Machines. The Motley Fool has a disclosure policy.
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