Investors are currently on the lookout for ways to profit from the ongoing AI gold rush. It’s common for people to focus on the companies that provide their own AI technologies, like Alphabet’s (NASDAQ: GOOGL) (NASDAQ: GOOG) AI assistant, Bard, and Microsoft’s (NASDAQ: MSFT) ChatGPT integration in Bing/Edge.
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However, instead of trying to predict which company will come out on top, why not consider an alternative approach and profit from the companies that fuel the AI revolution? Think about it, while everyone is frantically searching for gold, it may be wise to be the one selling the shovels that help them dig!
One such company that plays a crucial role in the AI revolution is Nvidia Corporation (NASDAQ: NVDA). As a leading technology company specializing in graphics processing units (GPUs), Nvidia powers the AI algorithms and deep learning models that drive advancements in the field, including those that are currently in the spotlight, like Bard, ChatGPT, and DALL·E 2. Nonetheless, I am neutral on the stock due to its valuation.
What is Nvidia’s Role in the AI Revolution?
Nvidia’s position in the ongoing AI revolution is paramount, even though the company’s reputation largely revolves around creating top-notch graphics cards for gamers and Bitcoin (BTC-USD) miners.
Specifically, Nvidia’s GPUs are the go-to choice for many of the world’s biggest tech companies, such as Microsoft and Google, in the realm of artificial intelligence (AI). That’s because Nvidia’s GPUs are designed for high-performance computing, which is crucial for handling the vast amounts of data and complex calculations required for large-scale AI systems.
All this data is stored and proceeded through data centers — a market that Nvidia dominates — due to its capability to assemble GPUs that can tackle massive data processing with ease. This is of utmost importance to companies like Microsoft and Google, who are looking to push AI to new frontiers.
To give a more practical example, back in November, a month before ChatGPT was released and AI started dominating headlines, Nvidia announced that it was teaming with Microsoft to build a “massive” cloud AI computer. This partnership aims to harness the power of Microsoft’s scalable virtual machine instances to turbocharge progress in generative AI models, such as ChatGPT and DALL-E.
Microsoft’s decision to partner with Nvidia was a wise one, as Nvidia is unmatched in its cards’ processing capabilities, not just in the AI industry but across the board. This was evident during the Bitcoin mining craze, where Nvidia’s GPUs were the go-to choice for miners due to their unparalleled ability to execute complex computations in the most efficient manner possible.
To quantify Nvidia’s dominance in the space and solidify this argument overall, according to IDC, the company holds 90%+ of the enterprise GPU market. Therefore, if there is one company that is poised to thrive via the AI revolution, it’s certainly Nvidia.
Rising Expectations are Driving Nvidia Stock Higher
The market is well aware of the tailwinds Nvidia stands to enjoy from the ongoing AI revolution, and this basically translates to one thing — higher expectations. With the prospect of persistently-high demand for Nvidia’s chips fueled by its partnerships with AI industry leaders, investors are now factoring in the anticipated increase in future profits and revenues into their outlook for the company.
In fact, with expectations rising by the day, as positive developments in the AI space have been dominating global headwinds, so has the stock. In October, just before its partnership with Microsoft began and before the release of all these AI tools and platforms, the stock had dipped below $110. Since then, the stock has more than doubled, with Nvidia trading above $229.
The consequence of this, however, is that the stock’s valuation has expanded massively during this period. With Nvidia’s P/E now hovering close to 67 times its projected earnings for Fiscal 2023 (ending January 2023), the market must certainly have crazy earnings growth expectations from the company.
Even though Nvidia has historically traded at a hefty valuation, don’t forget that, at the end of the day, Nvidia is a semiconductor company operating in an industry known for its cyclicality. While we are accustomed to seeing Nvidia trade with a P/E ratio in the 30s and 40s, a P/E approaching 70 is extraordinary, even for Nvidia’s standards.
Is NVDA Stock a Buy, According to Analysts?
While Wall Street analysts have been increasingly bullish on Nvidia lately, the stock has rallied so much lately that it has surpassed most price targets.
The stock has a Strong Buy consensus rating based on 22 Buys, five Holds, and one Sell assigned in the past three months. However, at $209.19, the average Nvidia stock forecast implies 8.91% downside potential.
The Takeaway
Nvidia is arguably one of the, if not the most well-positioned, companies to succeed in the ongoing AI gold rush. With demand for processing power expected to skyrocket in the coming years and Nvidia offering the best products in the market to service this demand, its revenues and profits are set to snowball.
However, the stock’s current valuation could be too rich, even under quite optimistic future assumptions. Therefore, keep the stock’s rich multiples well in mind before taking action, regardless of the underlying business’s success prospects in the AI universe.
