Nvidia (NASDAQ: NVDA) once again reported an explosive quarter last week, with revenue and net income soaring in the double digits. Nvidia’s stock price surged after the report, crossing the $1,000 mark, as the company pleased investors not only with its earnings momentum but also with news of a stock split — set for early June. This will bring down the price of each individual share, making it easier for a wider array of investors to buy.
The company, as the artificial intelligence (AI) chip leader, is benefiting as the world turns its attention to AI. This represents great demand, from both companies and governments, for Nvidia’s top-performing chip as well as its complete AI systems. And this leads me to Nvidia’s biggest problem right now.
Image source: Getty Images.
Nvidia’s AI chip leadership
First, a quick look at how and why Nvidia has reached its position, dominating the billion-dollar AI chip market. The company started out primarily serving the video game industry with its graphics processing units (GPUs), chips with the ability to process many tasks simultaneously. That equals speed and general high performance, and it eventually became clear that other industries could use such a chip, too.
Nvidia created CUDA, a parallel computing platform, and this opened the door to the GPU’s presence in general computing — including AI. The start of the AI boom represented a key turning point for Nvidia, and we can see this in the company’s earnings and share price performance.
NVDA data by YCharts
Nvidia, first to market with the highest-powered chips for AI, continued to innovate, and that’s what’s helped the company maintain its market leadership. In fact, Nvidia pledges to release a new chip every year, a promise that could make it extremely difficult for a competitor to unseat this market giant.
But amid all of these positive points, Nvidia does face a challenge, and that’s the ability to keep up with market demand. Of course, it’s great that companies and governments want Nvidia’s chips and related products, and the momentum even suggests Nvidia shareholders shouldn’t worry too much about a risk that’s been mentioned in the past: the fact that Nvidia customers such as Amazon and Meta Platforms are developing their own AI chips.
But investors can’t ignore the fact that if Nvidia can’t supply its customers with what they want when they want, it might risk losing them.
Nvidia is “racing every day”
“We’re racing every single day,” Nvidia CEO Jensen Huang said during the company’s recentearnings callwith analysts. He added that applications like ChatGPT, large language models, and work being done at all of the cloud service providers “are consuming every GPU that’s out there.”
Huang said customers are pressuring Nvidia to deliver systems, and this demand surpasses supply.
The positive point here is we probably shouldn’t worry about Amazon, Meta or other customers exclusively using their own chips — or other chips — and forgetting about Nvidia. Instead, what we should keep an eye on is Nvidia’s ability to deliver chips and systems to customers — and maximize its revenue potential. Where Nvidia could lose out is if another player, for example Intel, is able to deliver a rival product more quickly. Some customers still may hold off and wait for Nvidia, but others may opt for the fastest to deliver. If this happens, over the long term it could weigh on the chip designer’s growth.
So, today, the biggest problem facing Nvidia is the ability to keep up with demand for its products, and it will be important to see how this evolves once the company releases its Blackwell architecture and chip later this year. Since this does represent a major turning point, with Blackwell boasting six innovations, customers probably will be willing to wait if demand soars and this impacts delivery schedules.
As of last month, the shortest delivery time for Nvidia’s H100 GPU was about two months, down from as much as 11 months last year, according to website Tom’s Hardware.
What does this mean for investors?
Though soaring demand represents a problem for Nvidia, it also represents a positive point: Customers want Nvidia’s products and services, and to a certain degree are even willing to wait for them. Nvidia clearly is aware of demand surpassing supply, and the company knows rivals are eager to take market share, so I would expect Nvidia will do what it can to keep delivery times down to a reasonable level and keep itself in the lead in this high-growth market.
Investors should keep an eye on how the supply-demand problem evolves, but it shouldn’t stop investors from buying Nvidia shares right now.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Meta Platforms, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
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