NVIDIA’s stock has been surging since 2023, experiencing a remarkable 210% increase amid the growing demand for artificial intelligence (AI) and cloud technology. This significant growth has caught the attention of many investors, even though they might not fully comprehend the reasons behind the company’s success.
One of the key drivers of NVIDIA’s impressive performance lies in the field of AI. AI involves complex calculations executed swiftly, prioritizing task completion over traditional instruction processing. This has led to an increasing demand for powerful processors like the ones produced by NVIDIA.
Furthermore, cloud data centers are transitioning from less expensive central processing units (CPUs) to graphics processing units (GPUs)—the specialty of NVIDIA. These GPUs emphasize speed rather than cost, with the belief that expenses can be amortized over time. NVIDIA’s acquisition of Mellanox in 2020 for $7 billion has proven to be a strategic move. Mellanox specializes in enhancing data transfer between machines, resulting in faster and more cost-effective operations. This acquisition enabled NVIDIA to offer a complete hardware-software system to the cloud, extending its dominance as a supplier.
Financial analysts anticipate a 36% growth in NVIDIA’s revenue, accompanied by even faster profit growth. However, some observers, including the author of this article, question whether the company’s current valuation, which is 28 times its revenue, is justified. The author draws upon two decades of experience in technology and cloud developments to express skepticism regarding the lofty predictions of NVIDIA monopolizing the $300 billion AI chip market. Competitors such as Microsoft, Meta, and Qualcomm, as well as Alphabet diversifying toward Advanced Micro Devices, are introducing alternative solutions. The author suggests that lower costs will attract other cloud giants to explore new architectures under their control, challenging NVIDIA’s potential market share.
Despite these concerns, the author maintains a positive outlook on NVIDIA as a business. Beyond its hardware and software sales, the company is evolving into an AI venture capitalist, strategically investing in promising startups like Recursion Pharmaceuticals, a company dedicated to utilizing AI for drug discovery. Nonetheless, the ever-evolving nature of the cloud and the evolving balance between client and server in AI necessitate caution. Even if one were to accept the optimistic estimates for NVIDIA’s growth by 2025, the current valuation appears to be significantly inflated.
The author warns potential investors to consider these factors before purchasing NVIDIA stock at its high valuation. A considerable news event, such as a significant contract for competitors like AMD or Intel or the emergence of a competitive architecture backed by a rival company, may trigger a decline in NVIDIA’s stock. Diversification of investments is recommended to mitigate potential risks and uncertainties.
In summary, while NVIDIA’s stock has experienced substantial growth driven by the demand for AI and cloud technology, the company’s high valuation warrants caution. Competitors and the ever-changing landscape of the cloud industry pose potential challenges to NVIDIA’s dominance. However, NVIDIA’s strategic investments in AI startups provide a promising avenue for additional growth. Ensuring a balanced view, investors must carefully assess the risks and opportunities before making decisions regarding NVIDIA’s stock.
