Should you byte into Nvidia stock?
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Nvidia (NASDAQ: NVDA) has been hitting new highs in recent days, with the company recently reporting a gargantuan 629% rise in earnings per share for its fiscal 2025 first quarter (ended April 28, 2024). A major beneficiary of generative AI (artificial intelligence) growth, Nvidia has seen a big revenue boost from this market in recent years. The stock has gained more than 150% in the last year and closed at about $1096 on May 31, putting it in the same league as Apple and Microsoft in terms of market capitalization. The company’s recent announcement about an upcoming 10 for 1 stock split will certainly make the stock affordable, but with all the hype about the company, is it still worth buying?
After starting off in 1993 as a GPU (graphics processing unit) chip provider primarily catering to the video gaming industry, the company has taken off in recent years due to its chips’ parallel processing capabilities. This enables quicker learning for AI due to faster processing of information than traditional CPUs (central processing units) enable, providing a competitive advantage. The company’s GPUs provide faster processing for computer networks to train AI in data centers. Parallel processing also means less energy consumption than using traditional CPUs for the high workload that AI requires.
Nvidia has also launched a cloud service that provides an AI training platform for its customers, enabling them to take a basic AI model from Nvidia and develop it to meet their own specifications.
Nvidia now sees itself as facilitating another industrial revolution. “Companies and countries are partnering with NVIDIA to shift the trillion-dollar installed base of traditional data centers to accelerated computing and build a new type of data center, AI factories, to produce a new commodity, artificial intelligence. AI will bring significant productivity gains to nearly every industry and help companies be more cost- and energy-efficient while expanding revenue opportunities,” Jensen Huang, Nvidia’s president and chief operating officer, explained on the company’s first quarter earnings call.
As a result of heightened GPU demand, Nvidia saw its revenue rise 262% over the year to $26.044 billion for its fiscal 2025 first quarter, with earnings per share at $5.98. For its last full fiscal year ended January 28, 2024, the company reported revenue of $60.9 billion, up 126% from its 2023 fiscal year. And earnings per share rose 586% over this period, to $11.93.
Booming demand
Demand has taken off as customers clamor for systems powered by Nvidia GPUs to train AI, such as generative chatbots. The biggest technology companies such as Tesla, Oracle, Microsoft, Meta, Alphabet, Amazon and Open AI are all Nvidia customers, enabling applications such as Chat-GPT, Meta AI and Microsoft Co-Pilot.
According to Nvidia, “In the last industrial revolution, power generation plants produced electricity. In this new industrial revolution, NVIDIA AI supercomputers are the AI factories that produce intelligence. Companies will operate a new type of facility, owned or rented, that produces AI to augment, accelerate, and amplify the productivity of their employees and business processes.” It seems countries such as Singapore and Italy are also clamoring for Nvidia-powered supercomputers to develop their AI infrastructure.
And with AI moving software to being more skills-based, rather than merely used to get information, it seems GPU demand has a long way to go. Huang explains, “AI will understand context and our intentions, be knowledgeable, reason, plan, and perform tasks.”
Other markets for Nvidia’s GPUs include the automotive sector (where they find use in self-driving cars), visualization for creative industries, healthcare, the metaverse and robotics. They’ve also been used for crypto mining.
According to Nvidia, “While the computing requirements of these end markets are diverse, we address them with a unified underlying architecture leveraging our GPUs, CUDA (compute unified device architecture software platform) and networking technologies as the fundamental building blocks.”
Tremendous growth opportunity also attracting competition
The generative AI market presents tremendous opportunity; a Bloomberg Intelligence report says it will grow to $1.3 trillion in the coming 10 years, leapfrogging from $40 million in 2022, representing a compounded annual growth rate of 42%. This growth will be driven by demand for training infrastructure initially, and grow to encompass demand for inference devices, digital advertisements, specialized software and services over the long-term. And McKinsey reportsthat globally, generative AI presents an opportunity for industries to add value of up to $4 trillion annually, largely from productivity gains.
While Nvidia’s GPUs have made an impact, it operates in a competitive industry and there are other businesses eager to get a share of the GPU chip market. Nvidia’s GPU chips were initially made for graphics processing and are not optimal for AI use. Startups, such as Cerebras, Groq and MatX, are looking to come out with chips developed specifically for AI purposes. Still, Nvidia does have the first mover advantage. CUDA, its software programming system for GPUs, is widely used and it will be difficult for newcomers to upstage it and get programmers to alter their code to work well with newer chips.
Other risk factors for Nvidia include having to comply with government data privacy and security rules. The U.S government has also implemented licensing requirements for sales of some Nvidia products to China, in a bid to prevent the Chinese from building up their AI capabilities. Nvidia sales to China have dropped off as a result, from 19% of data center revenue for its fiscal 2023 year to 14% for fiscal 2024. The company could also be impacted by geopolitical tensions impacting Taiwan (where most of its chips are manufactured), Israel, Hong Kong and Korea.
Financial performance
Financially, the company looks to be on strong footing, For its recent 2024 fiscal year, Nvidia reported that its gross profit margin was an enviable 72% (compared to the semiconductor industry average of 67%).
Liquidity-wise, its current ratio for the 2024 fiscal year is at a healthy 4.17, indicating a sound liquidity position (with adequate current assets to cover its current liabilities), and also an improvement from 3.53 for fiscal 2023. Considering debt, Nvidia’s debt-to-equity ratio is at 0.22, down from the previous year’s 0.5, a positive move, indicating the company has not taken on more debt than it can handle. It also beats the semiconductor industry average on this front, which is north of 0.40. With rising demand for its products, the company’s inventory turnover ratio (indicating how fast it is turning its inventory into sales) has moved up slightly to 3.18 from the previous year’s 2.99.
Should you take a byte?
Nvidia is poised to benefit from the transition to a post-information age economy in which software is getting upskilled from merely retrieving information to performing tasks and assisting humans. Certainly, the potential to unleash economic productivity in all sorts of industries looks promising in terms of generating more demand for GPUs. (As a journalist, I have myself benefited from a productivity gain from using AI to transcribe interviews, rather than doing this task manually.)
However, there is competition waiting in the wings to seize market share and it’s not a given that Nvidia will maintain its competitive advantage. Some Nvidia customers, such as Google, are also developing their own AI-training chips. Besides, the semiconductor industry is a cyclical one and Nvidia has seen its share of ups and downs.
On a valuation basis, it has a price to earnings ratio of 64, a book value per share of $19.68 and trades at about 55 times its book value. While these metrics are certainly lofty, they are within reason considering growth prospects, and not on the same footing with the hyped up metrics of the dotcom boom. Nvidia also pays a dividend and is authorized to buy back up to $22.5 billion of its stock, which would provide some support for the stock price.
Although the risk is high, and book value per share will go down post-split , Nvidia seems worthy of a byte as it becomes more affordable post-split.
Note: I do not own any individual Nvidia stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.
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