Nvidia’s (NASDAQ:NVDA) stock price has increased by more than 900% since November 2022, when ChatGPT created the generative AI (artificial intelligence) boom. And even after a 1:10 stock split, the stock traded above US$125. A stock’s value is not determined by the stock price but by its future return potential. Nvidia’s stock price rally has fundamental backing. What are these fundamentals justifying a 900%-plus rally?
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What is driving this tech stock even today?
Nvidia was the company that gave the world the first graphics processing unit (GPU), the Geforce 256, in 1999. Graphics have always consumed a higher computing load. The company first used its GPUs on PC gaming and changed the way people play games. GPUs became popular among high-compute workloads like the esports trend and crypto mining.
Nvidia started working on AI in 2006 and used GPUs for parallel computing through its Compute Unified Device Architecture (CUDA) platform. Its 16 years of efforts paid off in November 2022 when generative AI became popular. Nvidia’s GPUs were unbeatable as it now had a data centre GPU, a high-performance computing (HPC) GPU. What analysts and investors see is the 900% rally in 18 months. What they don’t see is the 16-year effort and a well-defined roadmap of how AI will evolve, which Nvidia envisioned for decades.
Today, no other semiconductor chip matches the performance of Nvidia’s data centre GPUs. By the time competitors come closer to its performance, Nvidia could be generations ahead. Nvidia has highlighted in its presentation that it is working with more than 100 customers in building AI factories installed with 100s to 10,000s of GPUs. And these are just the big orders. There is a Sovereign AI revenue opportunity of high single-digit billions of dollars this year alone.
Could Nvidia sustain its GPU order book?
There are fears that once Nvidia completes all these orders, there will be a dry spell. Nvidia has seen such tides, especially during the crypto bubble when miners ordered planes full of GPUs, only to sell them in the secondary market after the bubble burst. However, AI mostly has enterprise customers.
Within the data centre market, it is expecting automakers to be the biggest customers. This means the current AI boom is setting the stage for the next big revolution of autonomous cars. Here again, Nvidia is ahead of its peers.
Nvidia’s CEO, Jensen Huang, calls this “The next industrial revolution”. The first industrial revolution drove the demand for machines and oil. The next industrial revolution will commoditize AI. Imagine robots making goods in factories, mining, managing traffic, driving cars, and diagnosing diseases.
This will not only drive demand for data centre GPUs but also automotive GPUs, professional visualization, AI at the edge, and network infrastructure. If a mobile has no network, its usage is limited to a notepad, camera, and video recorder. Similarly, AI is only strong when it is connected to the network. Nvidia also sees a multi-billion dollar opportunity in Ethernet solutions, which connect AI edge devices to the network or bring the network to AI edge devices.
Nvidia is preparing for this revolution. Generative AI is just one of the applications of the AI industrial revolution.
Why I’d buy Nvidia stock even at today’s prices?
Ten to fifteen years from now, Nvidia’s valuation of 38.7 times the sales per share looks like a hefty discount. Looking at the big picture and Nvidia’s strong product roadmap of H200 and Blackwell, the stock is a buy even at today’s price.
And speaking fundamentally, Nvidia has an asset-light model. This means the company does not manufacture GPUs. The company only designs them and builds software infrastructure, removing the fixed cost of factories and equipment. It outsources the manufacturing to Taiwan Semiconductor Manufacturing Company (TSMC). Thus, Nvidia’s US$9.8 billion debt is small next to its US$31 billion cash reserve. There is no denying that the growth will slow in a year or two, but a similar growth cycle will return with a new AI application like autonomous vehicles.
