It’s undeniable how artificial intelligence (AI) has influenced the market over the past year. Some argue that the latest advancements in AI played a role in sparking the rally in 2023, lifting Wall Street from a bear market.
Generative AI offers the promise of increased productivity, and analysts are projecting its potential value to start at the $1 trillion mark, with expectations for exponential growth.
As businesses and investors scramble to capitalize on this monumental opportunity, skeptics have labeled the trend as a bubble or mere hype. However, Arm Holdings CEO Rene Haas dismisses these concerns, boldly asserting, “AI is not in any way, shape, or form a hype cycle. We believe that AI is the most profound opportunity in our lifetimes, and we’re only at the beginning.”
This sentiment expressed by Haas echoes the sentiments prevalent in the tech industry. In line with his perspective, I am inclined to fervently invest in one AI stock: Nvidia (NASDAQ: NVDA).
Image source: Getty Images.
Pioneering Innovation
Examining Nvidia’s journey to becoming a dominant force in the technology landscape is informative. Initially known for pioneering the modern graphics processing unit (GPU) to render lifelike images in video games, Nvidia harnessed parallel processing, which allows tackling complex mathematical tasks by breaking them down into manageable parts and running them simultaneously. The company astutely recognized the broader applications of this technology, expanding its use to areas like AI, cloud computing, data centers, and self-driving technology.
Nvidia’s early lead in machine learning, a precursor to AI, and its substantial market share in this segment (estimated at around 95% by New Street Research) positioned the company to embrace generative AI when the time came.
Cloud infrastructure providers, facilitating the accessibility of generative AI, form a significant portion of the current demand for AI. Notably, prominent entities such as Amazon Web Services, Microsoft Azure, Alphabet’s Google Cloud, and IBM Cloud, among others, leverage Nvidia processors in their cloud operations. Nvidia commands an estimated 95% share of the GPUs used in the data center market, as indicated by CFRA analyst Angelo Zino. The rollout of generative AI has prompted an upgrade cycle in the data center industry to handle its computational demands, an opportunity thought to be worth approximately $1 trillion by Rosenblatt analyst Hans Mosesmann.
Relentless Ingenuity
Nvidia’s rapid pace of innovation leaves its rivals struggling to catch up. As soon as a competitor develops a processor nearing Nvidia’s capabilities, the company propels the next generation of its lightning-fast chips. The driving force behind this perpetual advancement is Nvidia’s burgeoning research and development (R&D) budget, rivaling that of a small nation.
For instance, in fiscal 2023, Nvidia allocated a striking 27% of its total revenue, amounting to $7.34 billion, toward R&D, fueling the creation of its next-generation technology. Notably, the company continued this momentum, spending $6.2 billion in the first three quarters of fiscal 2024, with the full-year figure expected to surpass this during Nvidia’s upcoming financial disclosures.
This substantial investment has enabled Nvidia to maintain its position at the vanguard of the AI trajectory, underlined by its impressive fiscal 2024 third-quarter results. The company achieved record revenue of $18.1 billion, a 206% year-over-year surge, resulting in diluted earnings per share of $3.71, marking a staggering 1,274% increase. Despite the favorable comparisons from the previous year’s market downturn, these results undeniably signify a remarkable performance.
While some investors may balk at Nvidia’s lofty valuation, which stands at 92 times earnings and 39 times sales, it’s important to consider the company’s triple-digit growth, which management anticipates will persist. Assessing the stock through the more relevant lens of the price/earnings-to-growth (PEG) ratio reveals a valuation of less than 1, indicating an undervalued stock. Given Nvidia’s unmatched industry foothold, consistent growth trajectory, and comparatively modest valuation, it remains the singular stock that I intend to continually acquire if AI indeed represents “the most profound opportunity of our lifetimes.”
Should you invest $1,000 in Nvidia right now?
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