NVIDIA Riding the AI Wave

NVIDIA reported earnings after the close. The financials were OK, a little higher than expectations, but nothing extraordinary. However, the company sees the nascent AI boom as a huge opportunity on multiple levels. Shares are trading 8% higher in pre-market.

The fourth largest company in the Nasdaq 100 (4.2% weighting) is soaring and pushing the tech-heavy stock index higher for good measure!

There’s definitely a risk that people are getting carried away by The Next Big Thing, but markets don’t usually wait around for confirmation. By the time something is confirmed, it’s normally in the price. Buy the rumour, sell the fact is a timeless market cliché for good reason.

So, what’s actually been said?

First up, the numbers.

• Quarterly revenue of $6.05 billion, down 21% from a year ago
• Fiscal-year revenue of $27.0 billion, flat from a year ago
• First quarter of fiscal 2024 revenue is expected to be $6.50 billion, plus or minus 2%.

Nothing immediately groundbreaking here. Revenues are healthy, but not exploding, nor is the company forecasting exceptional growth in the next quarter.

However, AI is the latest buzzword and there are multiple ways that NVIDIA can benefit. Here’s how founder and CEO Jensen Huang is framing this opportunity:

"AI is at an inflection point, setting up for broad adoption reaching into every industry. From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI.”

“We are set to help customers take advantage of breakthroughs in generative AI and large language models. Our new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production.

“Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering,”

NVIDIA is partnering with leading cloud service providers to offer AI-as-a-service that provides enterprises access to NVIDIA’s world-leading AI platform.

Further details will be shared at the company’s GTC developer conference, taking place virtually March 20-23.

Which all sounds wonderful. The launch of ChatGPT has really brought AI into the mainstream, and companies like NVIDIA can consider themselves well-positioned to benefit from commercial interest.

The phrase "during a gold rush, sell shovels" partially applies here too. NVIDIA is selling all kinds of ‘shovels’ in the AI space including automotive solutions & cloud infrastructure, and they also launched ‘AI as a service’, to leverage their own AI supercomputer.

Caution is usually warranted for The Next Big Thing. Sometimes it doesn’t work out as hoped…

Thomas Thornton of Hedge Fund Telemetry shared his opinion:

“NVIDIA does a great job exploiting every trend. And when the trend ends a new one will be there. RIP Data centers, crypto mining, metaverse, laptops, gaming. Hello AI.”

You could read exploiting as having negative connotations, but perhaps this is simply a company that’s exceptionally good at positioning/marketing themselves for whatever the prevailing trend is. All under their vast umbrella of ‘computing power’.

So far, investors are willing to keep betting on NVIDIA’s growth. Before earnings, the stock’s trailing PE ratio was 88.31 and the forward PE ratio hit 39.53. Those ratios aren’t typically associated with the word ‘cheap’, but the market seems happy to keep paying up for now.