Artificial intelligence (AI) has undeniably altered the market course over the past year. Some would assert that the recent AI advancements served as the impetus for the 2023 market rally, lifting Wall Street from its bear market slump.
Generative AI is forecasted to unleash a torrent of elevated productivity, with speculative estimations beginning at around $1 trillion and exceeding. This looming opportunity has spurred businesses and investors into a frenzy to claim their share of the pie. However, there are dissenting voices decrying the movement as a mere hype or bubble.
Rene Haas, CEO of Arm Holdings, dismisses these reservations. In an interview with Bloomberg Technology, Haas declared, “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.”
Aligning with Haas’s sentiment, major tech corporations are echoing similar convictions. If Haas’s foresight proves accurate – and it is my firm conviction that it will – Nvidia (NASDAQ: NVDA) is the AI stock that I plan to accumulate aggressively.
Image source: Getty Images.
Nvidia’s Historical Dominance
Nvidia solidified its position as a dominant force in technology through groundbreaking strides. The company pioneered the modern graphics processing unit (GPU), revolutionizing lifelike imagery in video games.
It capitalized on parallel processing technology, which dissects intricate mathematical processing tasks into manageable components, running them simultaneously. Nvidia astutely recognized the broader applications of this technology, pivoting to apply it across earlier iterations of AI, cloud computing, data centers, self-driving technology, and beyond.
Anticipating the potential of generative AI, Nvidia made strategic preparations. Currently, a significant portion of the demand for AI stems from cloud infrastructure providers offering generative AI to their clientele. Notably, Nvidia’s clientele for cloud computing includes tech giants such as Amazon Web Services, Microsoft Azure, Alphabet’s Google Cloud, and IBM Cloud, as well as Oracle Cloud, Baidu AI Cloud, Alibaba Cloud, and Tencent Cloud.
Nvidia maintains an estimated 95% share of the GPUs utilized in the data center market, highlighting its status as the preeminent option for expediting data through digital pathways. Industry analysts project that AI has triggered an upgrade cycle within the data center arena to manage generative AI’s computational demands, with an estimated market worth of approximately $1 trillion, signifying substantial untapped potential.
Nvidia’s Nimble Pace
Nvidia’s rapid pace of innovation poses a formidable challenge for its competitors to gain ground. Upon the release of a processor approaching Nvidia’s capabilities, the company promptly introduces the next generation of its lightning-fast chips. The driving force behind this agility is Nvidia’s ever-expanding research and development (R&D) budget, comparable to the budget of an entire nation.
Illustratively, in Nvidia’s fiscal 2023, the company allocated 27% of its total revenue, amounting to $7.34 billion, to R&D, focused on developing the next iteration of its cutting-edge technology. As of the first three quarters of fiscal 2024, Nvidia has already invested $6.2 billion in R&D, a figure anticipated to climb when Nvidia releases its full-year report later this month.
This substantial investment in R&D has kept Nvidia at the forefront of AI progression, as evidenced by its recent financial results. In its fiscal 2024 third quarter, Nvidia achieved record revenue of $18.1 billion, marking a 206% year-over-year surge. This momentous growth translated into diluted earnings per share of $3.71, reflecting a staggering 1,274% increase. Despite the favorable comparative figures due to last year’s market downturn, these results remain exceptional.
While some investors cite Nvidia’s lofty valuation as a reason to steer clear of the stock, this perspective, in my view, is understandable but narrow-minded. At first glance, the stock appears to be trading at 92 times earnings and 39 times sales, seemingly exorbitant. However, evaluating the company’s triple-digit growth using the more appropriate price/earnings-to-growth (PEG) ratio reveals a valuation of less than 1, the standard for an undervalued stock.
Given the company’s unmatched industry position, a track record of substantial growth, and a surprisingly modest valuation, Nvidia is unequivocally the stock I intend to continue acquiring if AI indeed represents “the most profound opportunity of our lifetimes.”
Before considering an investment in Nvidia, it’s worth noting that the Motley Fool Stock Advisor analyst team has identified ten stocks they believe could yield substantial returns in the foreseeable future, with Nvidia not among them. The Stock Advisor service, distinguished by a history of tripling the return of S&P 500 since 2002, provides a comprehensive investment blueprint, encompassing portfolio development guidance, consistent analyst updates, and two new stock selections each month.
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