Ask Wall Street analysts about the current market for artificial intelligence and Nvidia stock — and you get a lot of different answers.
"There's a fourth industrial revolution that's being played out, and the godfather of AI is (Chief Executive) Jensen (Huang) and Nvidia. And I think this is really the start of a new tech bull market where Nvidia is leading it," Wedbush Securities analyst Dan Ives told Investor's Business Daily.
"Nvidia, right now, it's their world, and everyone else is paying rent when it comes to AI and what I believe is the biggest transformation to tech in the last 30 years."
LPL Financial analyst Quincy Krosby says the artificial intelligence theme is strong. But investors should be wary about the potential for this trend to get too hyped up. The latest AI boom reminds her of when the dot-com bubble burst more than two decades ago.
"When we start to see this push toward AI in everything we start, to those of us who worked in the industry in finance back then, it sort of sends chills up our spines," Krosby told IBD.
But Ives scoffed at that notion.
"Someone like myself that covered tech stocks back in the late 90s, in terms of the dot-com boom, and then, of course, the burst — I think it's apples to oranges in terms of the real spending that we're seeing, the fundamental stories playing out," he said. "I think it's actually laughable when people compare this to '99 and 2000, (speaking as) as someone who saw it firsthand."
Nvidia Stock Performance
Nvidia has been a top performer for 2023, nearly tripling in value. And as of late September, Nvidia was one of five U.S. companies worth more than $1 trillion. It stood alongside the market caps of Apple, Alphabet, Microsoft and Amazon.
But let's back up before Nvidia became a household name, and artificial intelligence took the investing world by storm. Until recently, its main product was the chips to run video game graphics cards.
In 2022 all that changed, when Chat GPT launched and became a cultural phenomenon. The chatbot uses Nvidia's AI chips to provide humanlike responses to prompts.
Since then, companies from education to defense have been working to incorporate artificial intelligence. Nvidia's chips are also guiding some early iterations of self-driving cars.
The company's customer base, which now also includes Amazon and Microsoft, has blown up, says Wall Street Journal reporter Charley Grant.
How Long Can Nvidia Stock Dominate The Market?
"Investors started to realize this company, Nvidia, is making the chips that anyone who wants to launch their own AI program is going to need," Grant told IBD. "So this whole AI phenomenon has turned into an enormous cash bonanza for Nvidia, the company, and as you can see, for shareholders who are lucky enough to own the stock before the spring" upward.
Nvidia's Huang said in the company's late August earnings statement "A new computing era has begun."
"Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI."
Profit for the chipmaker surged nearly 430% to $6 billion. Revenue was up about 100% year over year, hitting about $13.5 billion in the July quarter. Chip sales from Nvidia's data center business spiked 171% to $10.3 billion.
Nvidia is looking toward sales of $16 billion for the fiscal third quarter, up 170% year over year. That's well above Wall Street expectations for about $12.6 billion in revenue.
"It's grown up in a hurry in a very short time," Grant added.
Nvidia Demand Overdrive
But now the question is how long can Nvidia stock keep its market domination. That depends on how long corporate America pushes artificial intelligence projects, Grant said.
"If months go by, we get a recession, and the AI potential is no closer to delivering on its promise, you might see people say, 'Huh, maybe this investment doesn't make as much sense. Maybe we need to scale this thing back a little bit'," Grant said. "And if that happens, then Nvidia either won't be able to sell as much stuff or won't be able to command as high a price for the chips it does sell."
Grant went on to say: "So for now their sales are certain, and they're blockbusters. But for Nvidia to produce this kind of performance for years on end and justify today's valuation, eventually, we're gonna need to see some proof in the pudding on this AI stuff."
Another potential bottleneck for Nvidia is supply chain delays. Its AI processors reportedly sold out into 2024. And as for cost, online retailer CDW is selling the H100 (computing processor system) for more than $30,000. Auctioneers on eBay are seeking more than $40,000. Ives called these shortages the biggest risk to the company.
Nvidia Confident It Can Handle Rush
Despite competition from the likes of Advanced Micro Devices and Intel, Nvidia seems confident it can handle the rush.
Huang affirmed following the earnings call, saying "Our demand is tremendous. We are significantly expanding our production capacity. Supply will substantially increase for the rest of this year and next year."
But not everyone is so sure.
"One interesting thing in Nvidia's results is, accompanying this surge of revenue there's basically no extra cost built in, you know? Often when you have an exciting new product, you need to hire new workers, build a new plant — what have you." Grant said.
He added: "They have been able to keep their costs in line because their pricing power has gone through the roof. And so the question is, how long, you know, the overriding question is, how long can that last for on the supply front?"
The chipmaker mostly uses Taiwan Semiconductor Manufacturing for production. Taiwan Semi recently had to push back an Arizona factory opening due to labor shortages.
Lack Of Talent
"They don't have the talent. They're actually, you know, having to come in and train some of the local talent that's you know, there in that region," said LPL Financial's Krosy. "We need the talent in order to continue the growth. And it's something that's extremely important for the development,"
Hedge fund manager Jim Roppel says there's nothing artificial about Nvidia's growth potential.
"I think Nvidia is the most important company in the world. And I think it's deserving of the largest market cap. I think Nvidia is going to be the largest company in the world," Roppel said on a recent episode of Investor's Business Daily's "IBD Live" show.
He added: "And people are like, well, it's already gone up 300 this year. Yeah, take a look at what monsters do over in history. OK, give it five years. Give it three years. We'll see where it is."
But the Wall Street Journal's Grant warned, "I think investors would be wise to remember that when they're reading a gushy forecast, or you know, your broker says it's a hot stock, (then) it is a hot stock, and everyone knows it already. So what? How are you personally ahead of the game? And I think that's a tough question to answer when you've had the kind of breakout performance that we've seen this year."