The well-known chipmaker is again nearing its record highs. Since 2019, Nvidia’s shares have surged by 2,800%, highlighting the transformative potential of long-term investment. An individual who invested $1,000 in Nvidia stock at the time would now have approximately $28,000. However, it’s crucial to note that past performance does not guarantee future results. An examination into whether Nvidia retains its potential to create significant returns in the coming five years and beyond is warranted.
Optimism surrounding Nvidia has been reignited. Following the announcement of better-than-expected second-quarter earnings on August 28, a disconnect was observed between the company’s stock price and its performance. Despite a 122% year-over-year increase in revenue to $30 billion and a 168% rise in profits to $16.6 billion, the market’s response was not overly enthusiastic. Nevertheless, Nvidia’s management utilized its three-day AI Summit from October 7 to October 9 to bolster confidence in its hardware business. At the conference, CEO Jensen Huang showcased new applications for their technology, including autonomous robots, referred to as “physical AI.”
Aside from ambitious forecasts, investors have concrete reasons for excitement with Nvidia’s new Blackwell-based AI chip infrastructure. This next-generation technology promises up to a 25-fold reduction in training costs for large language models compared to older chips. The demand for these chips is already so high that they are sold out for the next twelve months, marking a significant advancement.
The industry remains driven by infrastructure needs. Cloud service providers are racing to procure as many AI chips as possible to provide superior computing power to clients and keep these resources away from competitors. Alphabet’s CEO, Sundar Pichai, has expressed that underinvestment poses a greater risk than overinvestment. This sentiment is shared by others in the industry. Meta Platforms, for example, is heavily investing in AI hardware, planning to spend between $35 billion and $40 billion on capital expenditures this year, much of which will fund data center infrastructure from Nvidia. Unlike Alphabet, Meta lacks a cloud business to potentially justify such expenditures. Moreover, Meta’s flagship LLM, Llama, is open-source and not intended for monetization, raising concerns about the sustainability of demand for Nvidia’s hardware.
This scenario bears resemblance to Meta’s earlier venture into the metaverse, where significant investment yielded little tangible outcome. Shareholders typically prefer profits over speculation, and Nvidia’s major clients, like Meta, might eventually face pressure to reconsider their substantial AI investments.
Nvidia has a relatively low valuation, trading at 35 times forward earnings, and its new AI chips could significantly drive revenue growth, indicating the potential for another strong market performance. Nevertheless, the speculative nature of the AI industry raises questions about how long its current momentum can continue without empirical results that justify the extensive capital investments. Long-term investors may seek further evidence that consumer-facing generative AI software is contributing sufficiently before taking a position in Nvidia’s stock. While the recent upswing is alluring, there is a risk of considerable market adjustment should AI technology lose its status as a strategic priority for cloud and data center providers.
