1. Pioneering Graphics Processing Unit (GPU) and Expanding Applications
Nvidia, established in 1993, is renowned for its groundbreaking graphics processing unit (GPU) technology. Initially designed for visually intense video games, GPUs excel at parallel processing, enabling simultaneous computation of multiple tasks. This feature proved invaluable in non-graphics domains, including the training of large language models (LLMs) for generative AI, leveraging vast data quantities.
Rather than resting on its laurels within the gaming industry, Nvidia capitalized on the immense potential of broader applications. The company’s remarkable transformation is exemplified by its latest financial results.
In Q3, Nvidia achieved a staggering 206% YoY revenue surge, reaching $18.12 billion. This growth primarily stemmed from sales of its AI-capable GPUs tailored for enterprise customers, with the data center segment constituting 80% of the company’s total sales. Consequently, Nvidia’s core gaming segment now accounts for just 16% of its revenue. Significantly, Nvidia’s flagship H100 GPU retails for a substantial $30,000.
Moreover, Nvidia’s net income skyrocketed by over 1,000% to $9.24 billion in the third quarter alone. Achieving a net income margin of 51% is a remarkable feat considering the firm’s physical product manufacturing and sales focus.
2. Intensifying Competition and Nvidia’s Economic Moat
Rapid growth and extraordinary profitability invariably attract rivals, and Nvidia’s GPU market dominance is no exception. The most significant threat comes from Advanced Micro Devices (AMD), Nvidia’s long-standing competitor. AMD is currently ramping up the production of its M1300x chip family, directly challenging Nvidia’s H100 in AI model training and inference, which involves real-time application execution post-training.
Nonetheless, Nvidia’s competitive advantage remains intact. Although AMD’s chips are reportedly equivalent in terms of performance, they are significantly behind Nvidia in terms of market launch and adoption, with substantial sales projections for 2024. Nvidia has ample time to release even more advanced chips, cementing its position at the forefront and enjoying the associated pricing power.
Given the projected $400 billion valuation of the AI chip market by 2027, both companies can coexist and seize the massive potential within the industry.
3. A Deeper Look at Nvidia’s Stock Valuation
Following its extraordinary surge in 2023, Nvidia’s stock price may appear expensive at first glance. However, evaluating the company’s rapid growth rate and exceptional margins provides a more accurate perspective.
With a forward price-to-earnings (P/E) multiple of 24, Nvidia’s stock remains relatively inexpensive in relation to anticipated future profits. This valuation metric fails to fully capture the company’s impressive growth trajectory and profitability.
As Nvidia continues to drive innovation, capture expanding markets, and solidify its position as an AI powerhouse, its shares present a compelling investment opportunity considering the promising road ahead.