Nvidia, the renowned chipmaker, has seen its shares skyrocket by an astonishing 29,000% since 2014, making it a quintessential millionaire-maker stock. However, investors are now questioning whether the company’s impressive past performance can be sustained in the future. Let’s delve into the details to assess whether Nvidia remains a viable investment opportunity.
Nvidia’s journey has been marked by a series of boom-and-bust cycles. Initially specializing in video gaming in the early and mid-2000s, the company experienced a surge in demand for its advanced graphics processing units (GPUs) when cryptocurrencies like Bitcoin emerged. However, both the gaming and cryptocurrency mining segments have since stagnated, now accounting for less than 10% of Nvidia’s fiscal second-quarter sales.
The company’s recent growth has been primarily driven by the data center segment, which represents approximately 88% of its sales. While Nvidia does not disclose specific product breakdowns, it is likely that a significant portion of its revenue comes from advanced AI chips, such as the H100 and H200, used for running and training large language models (LLMs).
However, there are concerns that Nvidia’s recent AI-led growth may be unsustainable. The surge in demand for AI chips could be fueled by capital-rich tech companies overspending to avoid falling behind, even if profitability is not expected. Meta Platforms, one of Nvidia’s top customers, plans to allocate a substantial portion of its capital expenditures to Nvidia GPUs. Yet, it remains unclear how Meta intends to translate its optimism into returns, lacking a cloud platform like Amazon or Alphabet to monetize its computing power. Additionally, Meta’s flagship LLM, Llama, being open source and free, poses challenges for monetization.
Tesla, another major client, is also heavily investing in Nvidia chips for its Dojo supercomputer, a project deemed a “long shot” by CEO Elon Musk. The speculative nature of many top clients’ AI strategies raises concerns that shareholders may push back on excessive capital spending, potentially leading to a decline in chip demand.
Despite these cautionary signs, there are reasons for optimism. Analysts project that the AI industry could contribute a staggering $15.7 trillion to the global economy, stimulating labor productivity and consumer demand. If this holds true, Nvidia’s potential as a millionaire-maker stock may just be beginning. Overcoming technological limitations by providing better hardware, such as the new Blackwell-based AI chips, could make running LLMs more cost-effective and increase profitability.
With a market capitalization of $3.5 trillion, Nvidia currently stands as the world’s largest company. However, the likelihood of delivering multibagger returns from this point appears slim. The bear case, which relies on fewer assumptions, suggests that many of the company’s clients are yet to generate substantial returns from their AI investments. While the introduction of Blackwell chips could trigger a short-term bull run, long-term investors may prefer to wait for a pullback before considering a position in Nvidia’s stock.