Nvidia's AI Dominance: A Double-Edged Sword for the Tech Market

Nvidia CEO Jensen Huang revived the AI trade this week. Here's how the pros are playing it

Recent comments from Nvidia CEO Jensen Huang seemed to revive investment in the turbulent AI sector this week, while leading portfolio managers to recenter attention on the winning trades. "We're now in this computer revolution," Huang said at the Goldman Sachs Communacopia + Technology Conference on Wednesday, "This generative AI is not just a tool. This is a skill ... this is why a new industry has been created." Huang said he sees data centers as a $1 trillion opportunity at minimum, with growth that will be accelerated thanks to generative artificial intelligence. Nvidia shares rallied more than 8% on the heels of Huang's remarks, which soothed some recent market jitters over the delayed payoff from AI investments. For the week, AI and semiconductor names such as Advanced Micro Devices, Marvell Technology, Super Micro Computer and Broadcom rallied double digits. NVDA 1M mountain Nvidia shares over the past month. "When Jensen says something like that, it indicates an optimism that there's enough demand to at least sustain growth for the next 1-3, years," said John Belton, portfolio manager at Gabelli Funds, referring to commentary about scaling manufacturing capacity manufacturing with Taiwan Semiconductor Manufacturing . "That's what got the market so excited." While Huang's comments may have reignited confidence in the turbulent space, investors see a variety of ways to play the opportunity over the short- and long-term. Beyond mainstay Nvidia, CFRA's Angelo Zino views hardware players as the biggest beneficiaries in the short-run as the initial build-out stage carries on. That includes Advanced Micro Devices as it ramps up its competing GPUs and networking players Broadcom and Marvell Technology that are supporting custom silicon chips in the works by Meta Platforms and others. Micron Technology should continue to profit off of rising memory needs, he said. Apple made headlines this week with the launch of its new iPhone 16 , with AI capabilities dubbed Apple Intelligence. Some Wall Street analysts appeared underwhelmed by the updates , casting some doubts on previous calls for a one-of-a-kind upgrade cycle. Zino isn't concerned by this. Longer term, he views Apple as the leading AI device play and AI personal assistant, especially as more consumers adopt its Vision Pro headset. Dell should benefit as the leading enterprise player as margins improve into the new year, he added. AMAT 3M mountain Applied Materials shares over the past three months. Belton is betting on infrastructure and equipment companies such as Applied Materials and KLA Corporation . Longer-term winners that build-out end user applications for AI may be too soon to call, he said. The rise of AI has spurred thousands of companies to hop on the train, fanning some concerns that investors could see a reprise of the dotcom bubble that burst in the early 2000s, said Mark Malek, chief investment officer at SiebertNXT. The firm -- an early investor in Nvidia -- views technology giants at the forefront of the cloud, including Microsoft , Alphabet and Amazon as ongoing beneficiaries of AI tailwinds, but notes that the biggest innovation is happening in the private markets. "The real thing is that what is lurking in the shadows, and those are mostly private companies," he said.

Nvidia fades, OpenAI soars. Time to take the temperature of the AI boom (NASDAQ:NVDA)

Earlier this week, reports surfaced that OpenAI was in discussions for a $6.5B funding round that would value the high-profile AI startup at $150B. This valuation was up sharply from earlier this year -- in February, the firm reportedly allowed its employees to sell shares at an $86B valuation. The news came at a contemplative time in the AI field, with a growing chorus of analysts questioning whether the excitement of the early days of AI had become too frothy, with valuations in the sector overstretching current market realities for the technology. That can be seen in this year's stock price performance for Nvidia (NASDAQ:NVDA), which has become the face of the AI boom in the public market. Shares surged from a price of $49.52 at the close of the last trading day of 2023 to a high just above $140 in June. That represented a surge of over 180% in under six months. Since then, the stock has stagnated. Profit-taking took NVDA below $100 for a brief period in the first half of August. Since then, it has settled in a range, closing Friday at $119.10. The official stance of Wall Street analysts remains overwhelmingly bullish on NVDA. Of the 60 analysts tracked by Seeking Alpha, 46 have Strong Buy ratings and another 10 give the stock a Buy. Still, many market watchers have grown more cautious. The consensus recommendation of analysts publishing on Seeking Alpha currently stands at a Hold, with 13 out of 52 issuing a Sell or Strong Sell rating. Seeking Alpha's Quant Rating is similarly neutral, with A+ grades for growth and profitability undercut by an F for valuation. "The risk of a 'lost decade' for Nvidia is extremely high and people holding the stock might consider selling (at least a part of) the position," Daniel Schönberger, an SA analyst who gives NVDA a Sell rating, argued. "And if sentiment turns, it is also extremely difficult to determine how far the stock might fall." "To be fairly valued, the company has to grow its free cash flow between 22% and 23% in the next ten years, followed by 4% growth until perpetuity," Schönberger estimated. "I don't think Nvidia will grow the bottom line (or free cash flow) by 23% annually for the next ten years and the stock is just overvalued at this point." That sentiment is echoed by fellow SA analyst David Ksir, who said, "While the AI opportunity is huge, it's unlikely that it will translate into significant earnings overnight. Specifically, I worry that investors may have gotten ahead of themselves (again), similar to the early 2000s and the dot-com bubble." Even with these warnings, there are signs that NVDA's recent stock-price movement signals more of a consolidation than the looming bursting of a bubble. As we have seen, OpenAI has seen its valuation balloon 74% since February, climbing from $86B to $150B. Even with its pullback in recent months, NVDA remains about 90% higher since the start of February, similar to the improvement OpenAI has seen in the same timeframe. Meanwhile, NVDA remains about 150% higher on a year-to-date basis. On a three-year basis, shares have jumped more than 400%. "Nvidia has strong growth potential to justify its high valuation," SA analyst Yiannis Zourmpanos stated. "Nvidia's market position in AI, too, justifies such expectations, while generative AI and autonomous vehicles are some of the trends that will keep up this growth."

Nvidia holds the key to the market. But is it worth this much?

Nvidia, a leading designer of advanced AI chips, has seen its stock rise nearly 150% in the past year, significantly boosting the S&P 500 index. Despite impressive earnings, recent market reactions suggest investors' expectations have grown too high. The future of AI and Nvidia's role in it remain crucial questions for the market.Nvidia designs most of the advanced chips that power artificial intelligence, and that has made it an earnings machine, producing astonishing profits that have buoyed the entire stock market. In the last year, Nvidia shares have returned nearly 150%, helping to fuel the nearly 25% gain in the S&P 500 stock index. Yet starting in late August, as the bedazzling aura surrounding Nvidia ebbed, the market stumbled. "The magic spell has broken," Aswath Damodaran, a New York University finance professor, said in an interview. For a year or so, he said, Nvidia could have reported virtually anything at all "and investors and traders would have found a way to convert that into good news." What changed? Nvidia hasn't faltered. Its latest earnings report was awesome. Of all the companies associated with AI, Nvidia has reaped the most benefits. Giants like Meta (Facebook), Alphabet (Google), Microsoft, Amazon and Oracle are voracious buyers of Nvidia's technology. The problem seems to be that, like a child who has eaten too many extravagant sundaes, the stock market didn't find Nvidia's latest rich offering of profits to be quite as phenomenal as it had come to expect. For investors, the crucial questions concern the future: How big will AI, the generational tech wonder, ultimately become and what will Nvidia's stake in it be? Most crucially, how much is Nvidia, perhaps the core AI stock, really worth? The answers are significant for the entire market, where AI and Nvidia rival the presidential election and the Federal Reserve's rate-cutting plans in importance. As a long-term, buy-and-hold index fund investor, I don't own Nvidia or any individual stocks. But to understand where the stock market and the trajectory of technology may be going, you have to understand Nvidia, so I called Damodaran for help. Second to None I've been underwhelmed by the AI chatbots. They don't summarize text or cite sources accurately and are only starting to reliably do math. But commercially available AI is improving -- and I have no reservations about the prowess of Nvidia. How high will Nvidia go? The sky's the limit, you might have said with some justification just a few months ago. Nvidia shares were rising in a sustained trajectory that few American stocks have experienced. That may seem an immoderate claim. I don't make it lightly. No publicly traded U.S. company with a lifespan of at least 20 years has ever surpassed Nvidia's stock performance through 2023, according to a July study by Hendrik Bessembinder, a scholar of stock valuations based at Arizona State University. From its initial public offering in 1999 through the end of 2023, Nvidia's stock rose an annualized 33.4%. Contemplate how staggering annual returns like that are: "This equates to a cumulative compound return of 131,500 percent," Bessembinder wrote. That means that for every dollar invested when Nvidia went public, you would now have $1,316. No wonder Jensen Huang, Nvidia's founder, has become one of the richest men in the world, with a net worth of more than $90 billion, according to FactSet. The problem for the stock market is that Huang was worth considerably more before Nvidia shares started sliding. From June 20 through Sept. 6, the company's stock fell more than 21%, though it has since risen. The summer decline was a mere hiccup compared with the roughly 2,500% that Nvidia gained over the last five years. But if you're a short-term trader, you could have been hurt. As a long-term investment, however, Nvidia has been a gem. The company has outpaced its peers, with chips and software that have become essential in exponentially growing industries: video games, bitcoin mining and now "artificial information factories." That's what Huang calls the server farms built on Nvidia technology -- the physical underpinning of the AI bots summoned up by millions of people on smartphones and computers. No One Rules Forever Nvidia's deep-pocketed corporate customers can't buy its products fast enough. (Because the Biden administration has deemed its most advanced chips and software to be strategically important, Chinese customers can't easily buy them but have managed workarounds.) Nvidia's latest earnings report was extraordinary. Its sales and revenue more than doubled in its most recent quarter, and its gross profit margin amounted to 75%. On more than $30 billion in revenue, it earned more than $22 billion. Coveted as Nvidia's tech may be, it's hard to imagine that it will be this profitable forever. Basic economics tells us that the company's exorbitant dominance of the growing AI infrastructure sector -- now at roughly 80% of the market -- contains the seeds of its own demise. The financial incentives for Nvidia's competitors to develop equivalent technology, and for its customers and suppliers to shed costs, both seem too high for Nvidia to command its lucrative perch indefinitely. Few companies can grow this rapidly and profitably for very long, as Damodaran points out in his new book, "The Corporate Life Cycle: Business, Investment and Management Implications." It elaborates on a concept that he has expounded for years: Like human beings, companies have a cycle of growth, decline and, sometimes, rejuvenation. In a blog post this past week, he assessed an Nvidia predecessor: Intel, the great chip designer of the last generation. He described it as an aging superstar that needs to accept a lesser role in the corporate universe. Intel, founded in 1968, was as dominant in its early years as Nvidia is now. At the moment, it is trying to compete not only with Nvidia as a designer but with Taiwan Semiconductor as a manufacturer. Intel's share price has fallen nearly 50% over the last year, to a level that Damodaran finds attractive. He says it can prosper as a sensibly conservative enterprise with pared-down ambitions. But Nvidia seems to still be in its growth phase. Larry Ellison, founder and chairman of Oracle, told analysts Monday that just one of Oracle's new AI data centers will contain "acres" of Nvidia chip clusters. Monumental purchases of Nvidia equipment are "required to stay competitive in the race to build one, just one, of the most powerful artificial neural networks in the world," Ellison said. OpenAI, whose ChatGPT bot set off the AI frenzy, is raising billions to buy more computing power, much of it coming from Nvidia equipment. The total market for the kind of AI technology supplied by Nvidia is $60 billion a year, Damodaran estimates, but it can grow to $500 billion in a decade. Nvidia's share of this AI infrastructure revenue is now 80%. If the company stays on top of its game, that share may drop only to 60%, which would keep the cash flowing. Similarly, while Nvidia's profit margins are likely to fall, the finance professor projected that they will be high enough for Nvidia to remain highly lucrative. Putting all that together, Damodaran's assessment of Nvidia, which he acknowledges is imperfect, changeable and, at best, one man's view, won't please die-hard Nvidia enthusiasts, but it's still relatively positive. After its meteoric rise, he said, Nvidia was roughly 20% overvalued before it started rising again. "It's a solid company," he said. It's just a bit overpriced at the moment, he said, adding that another wave of mass enthusiasm could propel it even higher. Whether the companies pouring vast sums into Nvidia technology will profit from their investments, individually or as a group, seems less clear. How powerful will AI become and what will its economic impact be? Though I'm not a true believer, I can't help but be intrigued. Nvidia is prospering and, like it or not, we are all being swept up in Nvidia's world.

Nvidia's 'correction' a moment of reflection

In the world of technology, few names carry as much weight as Nvidia. Their chips, particularly graphics processing units (GPUs), are the brains behind many artificial intelligence (AI) systems. From self-driving cars to virtual assistants like Siri, much of the modern tech revolution relies on Nvidia's technology. But it most often stays in the background of the gadgets and services we use while its engineers design the powerful chips that make everything work. So, when Nvidia's stock took a serious hit last month, it wasn't just a bad day on Wall Street -- the tremors rippled through the global tech sector. "When I look at the tech ecosystem, the intrinsic value of this company is very high and it is perhaps the most valuable to the world," says Prasanto Roy, a New Delhi-based technology and policy analyst. So, when investors suddenly pulled back, signalling their concerns on the company's stock prices, it raised bigger questions about the future of AI and technology in general. It appears the key reason Nvidia's stock tumbled 15% in a single day had to do with the sudden realization that growth, no matter how promising, is not always guaranteed. Tech stocks, particularly those linked to AI, have been riding a high. Nvidia, in particular, has become the poster child of the AI boom. But as with any boom, there comes a moment when investors start asking whether the future profits they have been banking on are actually going to materialize as expected. When Nvidia's stock fell, it wasn't just about the company's potential. It was a signal the broader tech industry had been running a little too fast. AI, for all its potential, is still in its early days. It's the shiny new toy that everyone's excited about, but the path from groundbreaking innovation to everyday application is often long and fraught with challenges. What Nvidia's stock drop hinted at was a growing realization that this journey may take longer and be more complicated than investors had hoped. "Typically such stocks go through the hype cycle and then become meme stocks. Now, suddenly, new investors want to own such stocks at ANY price. And that obviously is not a good thing," a Bengaluru-based fund manager pointed out. On his part, Roy is more optimistic. He points out that when we zoom out and look at the stock prices of Nvidia over the last five years, than the 'rout' as it is being described now is "actually just a correction". In fact, he says, over the last five years, the company edged past Microsoft to be the most valuable. So why the fall? "Because the markets had gone ahead of itself and projected unsustainable growth rates in the near to middle term," he says. To hammer it home, Roy adds it's about expectations catching up with reality. The second order outcomes of slower AI development include slower progress in areas like healthcare, creating the next generation of smartphones, virtual reality experiences, or even improvements to the streaming services we rely on for entertainment. Then, the uncertainty that Nvidia's stock drop symbolizes could lead to less investments in cutting-edge tech. Venture capitalists who fund start-ups and emerging tech companies, are often influenced by the mood of the market. If they sense that the AI hype is cooling off, they may pull back funding from projects that seem too speculative. How ought India interpret this message from Wall Street? "India must put its head down and continue to quietly build AI skills in volume, similar to what it did with software which grew steadily under the radar. India's strength lies in its vast talent pool who can develop AI expertise. This will ensure the country remains a key player in the future regardless of market fluctuations," Harish Mehta, a founding member of Nasscom and author of the Maverick Effect wrote in a text message. Nvidia's price correction then is a moment of reflection before the next leap forward. The more thoughtful leaders will read this to be more cautious and not be swayed by the hyper growth era such as the dot com boom years. Because a bust followed.