Current Investment Potential of Nvidia

Buy on the rumor and sell on the news goes the old stock market adage. We believe that this saying has meaning for the current investment potential of Nvidia stock. In the case of Nvidia it is not a rumor that has brought it to the central position for the computer infrastructure of the AI revolution. Nevertheless, the same sort of investor enthusiasm, sometimes bordering on hysteria, currently exists with AI in general and with Nvidia as with the sort of rumor-driven stocks referred to in the adage.


Nvidia Stock Performance and Prospects Going Forward

The performance of Nvidia’s stock has been little short of miraculous over the last 15 months. Nvidia sold for $146 a share at the end of 2022. It sells for $865 as of March 19, 2024. This nearly six fold increase in share value has catapulted Nvidia into the trillion dollar market cap club along with Apple, Microsoft, Alphabet, Amazon, and Meta. The company makes the extremely advanced and complex computer chips required for developing artificial intelligence. It stands head and shoulders above any competition in this field of endeavor. The first question for an investor is whether or not the stock is fairly priced today based on likely future earnings. The second is just how many chips and how many support services can Nvidia sell over the years to come. What is its real intrinsic stock value? Where does the stock go from here? Will they be able to sell enough of what will be really expensive chips to maintain their current torrid rate of stock increases? The stock currently has a P/E ratio of 72 times price to earnings. This is highest among the trillion dollar market cap companies.

Current Investment Potential of Nvidia

Luke Warm Response to Introduction of Blackwell Chip by Nvidia

As is common in the tech world. companies put on a show for the rollout of new products. For the Blackwell AI processor rollout the Nvidia CEO introduced this processor which contains 208 billion transistors! The price of the H100 chip that is currently Nvidia’s most advanced runs between $25,000 and $40,000. Customers include Apple, Microsoft, Tesla, Amazon, Meta, Oracle, and Alphabet. The price of the new chip will certainly be substantially higher than the H100. However, now we are getting into a “high cost of entry” business with fewer and fewer users. Certainly the US defense industry, and other branches of the government will be interested in developing this technology. The US government is already banning export of such high end processors for sale abroad, which could make a significant dent in potential Nvidia profits. Nvidia stock fell from $919 to $865 in response to the Blackwell chip rollout.

Where Does Nvidia and Its Chips Fit in the AI Story?

To get a sense of this you need to get a sense of how AI works. The reason that humans have generally been better at making good decisions on some things than computers is that humans combine their experience with their reasoning to come to decisions. The old move, War Games provided a simple example. Two supercomputers in charge of Russian and American national defense are going to go to war. The main actor in the movie teaches them to play tic tac toe. This is game in which nobody ever wins when played by folks who are paying attention. The “experience” needed by the computers makes all the difference and both sides stand down.

In today’s real world, AI computer programs learn using massive amounts of data. This training stage is then followed by inference, which is the business of running AI for practical applications. Years ago Nvidia chose to deal with problems that standard chips did not easily solve. This commonly meant developing technologies for combining multiple chips into more complex processors. Their development of AI chips is an extension of the graphic design and game-playing chips they have made for years. The new Blackwell chips will run many times faster than their current state-of-the-art processor and be able to handle multiples times as much data. This will translate into faster and better learning and improved ability to deal with real world problems. Ideally, it will result in common sense solutions to issues like nuclear war such as never starting one! On a practical level there are areas like medical pathology, pharmaceutical development, and more that stand to benefit from the top-of-line AI that Nvidia supports.

Who Makes Chips for Nvidia and Who Uses Them?

Nvidia designs computer chips and complex processors. They do not make them. Taiwan Semiconductor makes chips for Nvidia and will make the Blackwell chip. Any problems that Taiwan has with China could become an issue for Nvidia. On the customer end, folks like Johnson & Johnson are using AI to develop advanced analytics during surgery. AI is going to be used for a next generation of robots. AI is going to go into companion jets that will fly with US fighter jets on dangerous missions. The Microsoft supported ChatGPT is just one clear example of future applications.

Should You Invest in Nvidia Today?

The short term answer is that the stock may be overpriced today due to how excited folks are about everything AI. The long term answer is that world is changing and AI will become a lynch pin for many industries, branches of science, and governmental functions from city planning, energy grid management, and national defense. This is a very high cost of entry business. Thus Nvidia will not have any major competitors who are not already in the chip and processor business. It remains to be seen to what degree folks like Apple, Microsoft, or Tesla try to design and make their own chips or simply buy from Nvidia. Nevertheless, for years to come Nvidia is likely to grow and increase its dominance in this niche which will steadily increase its intrinsic stock value even while its market price may be driven higher or lower based on short term sentiment.

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