Nvidia, the iconic chipmaker, has experienced a remarkable surge in its share value, soaring by 29,000% since 2014. This impressive growth has positioned Nvidia as the quintessential millionaire-maker stock, with early investors reaping substantial fortunes. However, it is essential to approach the future with caution, as past performance does not guarantee future results. Let us delve into the available information to assess whether Nvidia remains a viable investment opportunity.
Nvidia’s history has been marked by a series of boom-and-bust cycles. While the company initially focused on video gaming in the early and mid-2000s, the advent of cryptocurrencies, particularly Bitcoin, created an unprecedented demand for its advanced graphics processing units (GPUs) for mining purposes. However, both the gaming and cryptocurrency segments eventually stagnated and declined, now accounting for less than 10% of Nvidia’s total fiscal second-quarter sales, which amounted to $2.9 billion.
The data center segment has emerged as the primary driver of Nvidia’s sales, representing approximately 88% of its revenue. Although the company does not disclose specific product breakdowns, it is likely that a significant portion of these sales comes from advanced AI chips, such as the H100 and H200, which are utilized for running and training large language models (LLMs). Should the demand for LLMs fade, Nvidia’s recent growth trajectory could dissipate.
The bear case posits that Nvidia’s recent growth, fueled by AI, may be on the verge of a significant slowdown or even a crash. While the company’s second-quarter revenue surged by an impressive 122% year over year to reach $30 billion, this growth could be attributed to an unsustainable AI race. Capital-rich tech companies, including Meta Platforms, one of Nvidia’s top customers, may be overspending on chips to avoid the perception of falling behind, even if profitability is not expected. Meta’s flagship LLM, Llama, is open source and free, making it challenging to monetize. This situation parallels Meta’s previous venture into virtual reality, which incurred substantial costs with minimal results.
Other tech giants, such as Tesla, are also purchasing significant quantities of Nvidia chips for ambitious AI projects. However, the speculative nature of their AI strategies raises concerns. Shareholders may eventually push back against excessive capital spending, leading to a decline in chip demand.
On the other hand, the bull case acknowledges the potential for continued growth in the AI industry. Analysts project that AI could contribute $15.7 trillion to the global economy by stimulating labor productivity and consumer demand. If this projection holds true, Nvidia’s journey as a millionaire-maker stock may have only just begun. Overcoming technological limitations through the development of better hardware, such as the new Blackwell-based AI chips, could pave the way for increased profitability. As LLMs become more efficient and cost-effective to run, the threshold for achieving profitability may decrease.