Due to the considerable attention generated by generative AI, such as ChatGPT, Nvidia (NASDAQ: NVDA) has risen to become the semiconductor industry’s most valuable player, boasting a market capitalization of nearly $1.2 trillion. This positions Nvidia significantly ahead of its nearest competitors, aligning it with tech powerhouses like Microsoft, Apple, Alphabet, and Amazon.
Curiously, Nvidia’s revenue in the past year doesn’t measure up to that of these tech giants.
However, Nvidia’s co-founder and long-serving CEO, Jensen Huang, expressed during the recent earnings call that “a new era of computing has commenced.” This assertion raises the question of whether this development could aid Nvidia in closing the sales disparity with other major tech players and whether it will provide validation for the stock’s potential for further escalation.
During Nvidia’s second-quarter fiscal 2024 earnings call, Jensen Huang elucidated two significant shifts currently unfolding within the realm of computing technology:
- Accelerated Computing: While CPUs (central computing units) remain essential for general computing tasks, Nvidia’s extensive history of developing GPUs (graphics processing units), initially designed for high-end video game graphics, has evolved. These GPUs are now harnessed in the cloud and other high-performance applications to accelerate computing speeds by a magnitude far surpassing what CPUs can achieve on their own.
- Generative AI: This emerging facet represents a notable high-performance computing workload, gaining considerable attention in 2023. The allure lies in its ability to create an AI algorithm once and then leverage its capacity to generate content such as text, images, video, software code, and even make decisions for robotics (such as self-driving car technology) over an extended duration, promising substantial financial advantages.
Exploring the Characteristics of This Emerging “New Computing Era”
Huang referenced estimations indicating the global value of the entire data center infrastructure is presently around $1 trillion. This infrastructure typically undergoes updates with new hardware (semiconductors, other components, and construction materials) every three to five years, translating to an annual global expenditure of approximately $200 billion.
Nvidia’s trailblazing work in computing acceleration has initiated a colossal upgrade cycle, refocusing these data centers towards the type of chips Nvidia designs. This shift addresses novel use cases like generative AI and other demanding high-performance computing tasks.
Consequently, Nvidia is experiencing a significant surge in revenue, particularly within its data center segment, which encompasses AI-related endeavors.
The second quarter witnessed a total revenue of $13.5 billion, and there’s a projected intake of around $16 billion for the third quarter. The management has confidently stated their clear insight into demand, extending well into the calendar of 2024. Additionally, they anticipate a swift escalation in supply, leading to final sales in every quarter, well into the forthcoming year.
What’s the Limit to Nvidia’s Potential Growth?
This trajectory signifies that Nvidia is on track to surpass the threshold of $50 billion in annual revenue this year. Should this growth persist well into the following year (Nvidia’s fiscal 2025), it has the potential to ascend to the position of the world’s largest semiconductor company by revenue. To provide context, Intel previously held this distinction with nearly $80 billion in annual revenue during its peak a few years ago. Presently, the highest revenue-generating entity is Taiwan Semiconductor Manufacturing.
Yet, does this performance validate Nvidia’s current market capitalization, which places it among the league of mega tech stocks? This validation remains contingent on the company’s continued rapid expansion and maintenance of a substantial level of profitability (as seen in Q2’s exceptionally high net income profit margin of 46%). The pivotal question now revolves around whether Nvidia can sustain its ongoing growth momentum beyond the following year (2024, or Nvidia’s fiscal 2025).
Remarkably, Nvidia’s stock has surged by an impressive 174% over the past year. However, anticipating a replication of such gains now that Nvidia has entered the $1 trillion valuation realm might be overly optimistic. Despite the company’s commendable financial achievements of late, the potential for further appreciation in share price could be significantly curtailed in the coming year or so.
When reviewing Nvidia’s historical performance, it’s evident that the stock has faced substantial downturns, as was the case in 2022. For those considering joining the Nvidia journey, exercising patience at this juncture is advisable. In the interim, there are other chip companies participating in the groundbreaking new computing era, which Nvidia has played a pioneering role in shaping.