Nvidia's (NASDAQ:NVDA) The incredible proliferation of artificial intelligence (AI) has left investors and analysts in awe. The chipmaker, which originally made a name for itself as a maker of graphics cards for personal computers (PCs), has seen its stock price jump nearly sixfold since early 2023.
However, this huge jump has led some on Wall Street to wonder if NVIDIA stock is in a bubble. From comparisons to the 1999 dot-com bubble to his potential decline in AI-related demand for the company's chips to its expensive valuation, some believe his Nvidia is waiting to collapse. There are multiple reasons to believe this is a bubble.
But a closer look at the AI market in general, and Nvidia in particular, reveals why the company is far from a bubble.
Why it's wrong to call Nvidia and AI a bubble
A stock market bubble is a “significant increase in stock prices without an accompanying increase in corporate value.'' In a bubble, companies are valued based on speculation rather than actual fundamentals.
However, when we take a closer look at how AI is driving productivity improvements across multiple industries, it is easy to see that adoption of this technology should ideally continue to gain momentum. Sho. for example, meta platform It said the integration of AI tools led to a significant 32% increase in revenue from advertising campaigns. Meanwhile, customer service representatives are reported to have increased their productivity by 14% thanks to his AI.
Meanwhile, factories are expected to increase productivity by 30% to 50% in the future by integrating AI, according to Bain & Company.investment bank UBS We think AI could boost productivity growth by 2.5% this year, which is higher than the Federal Reserve's forecast of 1.5%. UBS expects AI to increase productivity by 17% over the next three years.
Nvidia's chips will play a central role in driving these productivity improvements across a variety of industries. That's because AI models need to be trained with millions or billions of parameters before they can be deployed in the real world. These models are known as large-scale language models (LLMs) and are deployed across multiple industries, from manufacturing to automotive to cloud computing.
Training these LLMs requires the enormous computing power provided by Nvidia's GPUs. This explains why companies are lining up to get their hands on Nvidia's flagship H100 processor, giving the chipmaker a monopoly-like position with an estimated 90%+ share of the AI chip market. I am. The H100 sells for between $25,000 and $30,000, and Nvidia is reportedly making a 1,000% profit on these cards. raymond james. This explains Nvidia's impressive revenue and profit growth.
In other words, the meteoric rise in NVIDIA's stock price isn't based on speculation or exhilaration, but rather on the company's impressive sales and profit growth. The good news is that Nvidia is likely to be able to maintain impressive growth in the long term, and that the US government could play a key role in ensuring that his Nvidia remains a dominant force in the AI chip market. That's expensive.
New U.S. government grant could help Nvidia maintain its AI edge
This is not surprising, given that Nvidia's H100 processor, based on the Hopper architecture, has solid pricing power and is the go-to chip for customers looking to train AI models. After all, the demand for this chip was so high at one point that he had to wait a year before customers could get their hands on it.
Nvidia is currently planning to bring a new chip architecture to market known as Blackwell. The B200 Blackwell graphics card, which will replace the H100 when it launches later this year, will reportedly deliver a 7x to 30x performance increase compared to the H100. Nvidia also claims it can reduce energy consumption by up to 25 times.
This performance increase is not surprising, as Blackwell will reportedly be manufactured using a custom 4-nanometer (nm) node. taiwan semiconductor manufacturing, commonly known as TSMC. For comparison, the Hopper-based H100 was manufactured using TSMC's custom 5nm process. By reducing the size of the process node, TSMC has allowed his Nvidia to pack in 208 billion transistors compared to his 80 billion transistors in his H100.
These transistors are now packed more tightly together on a chip, providing more computing power, generating less heat, and reducing power consumption. And now, TSMC has received a $6.6 billion grant and $5 billion low-cost loan facility from the U.S. government to build its third chip factory in Arizona.
TSMC is expected to use these funds to build a 2nm chip factory. Nvidia plans to start mass production in 2025. Graphics experts are planning to develop even more powerful AI graphics cards, given that TSMC's 2nm chips are expected to become one of their customers. It's no surprise that the release of This explains why analysts expect his Nvidia's data center revenue to increase significantly in the coming years.
Additionally, NVIDIA's revenue is expected to grow at an annual rate of 35% over the next five years, according to consensus forecasts. Based on the company's fiscal 2024 earnings per share of $12.96, its bottom line could jump to $58.11 per share in five years.
Nvidia's average five-year forward earnings multiple is 39x, which is slightly higher than the company's forward earnings multiple of 36x. Nasdaq-100Considering the forward earnings multiple (as a proxy for tech stocks), the company's stock price could jump to $1,569. This would be an 85% increase from current levels.
However, don't be surprised if this AI stock delivers bigger returns. The market remains buoyant, as Nvidia could outperform Wall Street's revenue growth expectations and the company's product development moves should ideally help it remain a top player in the lucrative AI chip market. It could reward them with premium valuations.
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Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Nvidia Isn't in a Bubble: This Artificial Intelligence (AI) Stock to Buy – Pinch Your Fist Before It Goes Higher was originally published by The Motley Fool.
