Arm CEO Rene Haas calls AI “the most profound opportunity of our lifetime.” One stock I would buy fist pumping if he was right.
There is no getting around the impact of artificial intelligence (AI) on the market’s trajectory over the past year or so. Some might argue that the latest advances in artificial intelligence helped spark the rally in 2023, lifting Wall Street out of a bear market slump.
Generative AI promises to unleash a wave of increased productivity, and stock market experts are still debating how much it will ultimately be worth. Most estimates start at the $1 trillion range and go up from there.
An opportunity of this magnitude has companies and investors alike scrambling to get their share of the pie. Unfortunately, the mad rush has others denouncing the trend as a bubble or hype.
He says it’s not so Holding arm CEO Rene Haas. In an interview with Bloomberg Technology, the CEO said: “AI is by no means a hype cycle. We believe that AI is the deepest opportunity of our lives, and we are only at the beginning.” “
This is a bold declaration, but it is resonating in the halls of the world’s largest technology companies. If Haas is right — and I think he is — there’s one AI stock I’ll continue to buy fist-pumping: Nvidia (NVDA 3.58%).
Jack, be smart…
It’s worth taking a moment to step back and look at how Nvidia has become one of the dominant forces in technology today. The company pioneered the modern graphics processing unit (GPU), which delivers lifelike visuals in video games.
The technology that makes all of this possible is parallel processing, which can handle complex mathematical processing tasks by breaking them down into manageable parts that can be run simultaneously. Nvidia quickly realized that this technology had much broader applications, and focused on applying it to earlier versions of artificial intelligence, cloud computing, data centers, self-driving technology, and more.
The company took an early lead in machine learning — a predecessor branch of artificial intelligence — and boasts about 95% of that market, according to New Street Research. So when generative AI came along, Nvidia was ready.
Much of the current demand for AI comes from cloud infrastructure providers, who make generative AI available to their customers. A look at Nvidia’s list of cloud computing clients looks like some of the most important technology leaders: Amazon web services, Microsoft I visit, the alphabetGoogle Cloud, and IBM All clouds use Nvidia processors in their cloud operations, as they do inspiration clouds, Baidu cloud artificial intelligence, Ali Baba Cloud, and Tencent clouds.
Nvidia is the gold standard for over-the-air data acceleration, controlling an estimated 95% of the GPUs used in the data center market, according to CFRA analyst Angelo Zino. However, the opportunity is largely untapped. Rosenblatt analyst Hans Mosesmann posits that AI has ignited an upgrade cycle in the data center industry in order to cope with the computational demands of generative AI. With an installed base worth nearly $1 trillion, we have a long way to go.
The speed at which Nvidia innovates makes it difficult for its competitors to make gains. Once a competitor comes out with a processor close to Nvidia’s capabilities, the company is ready to introduce the next generation of its ultra-fast chips. the reason? Nvidia boasts an ever-growing research and development (R&D) budget that could manage a small country.
For example, in Nvidia’s fiscal year 2023 (ending January 29, 2023), the company spent 27% of its total revenue — $7.34 billion in total — on research and development, creating the next generation of its cutting-edge technology. Nvidia has already spent $6.2 billion through the first three quarters of fiscal 2024, and that number will undoubtedly be higher when Nvidia releases its full-year report later this month.
This heavy spending has kept the leading GPU company ahead of the AI curve, which is evident in its recent results. In the third quarter of fiscal 2024 (ending October 29), Nvidia generated record revenue of $18.1 billion, up 206% year over year. This reduced earnings per share to $3.71, which rose by 1,274%. Despite the easy comparison from last year’s market decline, the results were impressive.
Some investors cite Nvidia’s lofty valuation as a reason to avoid the stock — an understandable but short-sighted view, in my opinion. The stock is selling for 92 times earnings and 39 times sales It seems At first glance, this is outrageous but fails to take into account the company’s triple-digit growth, which management expects to continue. However, using a more favorable price/earnings-to-growth (PEG) ratio reveals a valuation below 1 – the benchmark for undervalued stocks.
Given the company’s industry-leading status, track record of growth, and surprisingly modest valuation, Nvidia is the one stock I plan to continue buying if AI is, indeed, “the deepest opportunity of our lifetimes.”
Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Fina holds positions at Alphabet, Amazon, Baidu, Microsoft, Nvidia, and Tencent. The Motley Fool has positions in and recommends Alphabet, Amazon, Baidu, Microsoft, Nvidia, Oracle, and Tencent. The Motley Fool recommends Alibaba Group and International Business Machines. The Motley Fool has a disclosure policy.