Nvidia (NASDAQ:NVDA) stock has benefitted as the company has defined the generative artificial intelligence boom of 2023.
Since the start of the year, NVDA is up 190%.
But they have been a lot higher. At the end of August, NVDA stock was selling at $485 per share, about $50 higher than it is trading now.
Is this a buying opportunity, or a bull trap? To understand the answer, you need to know exactly what Nvidia’s role is in the AI ecosystem.
Hardware has been software for over a decade now. The design of every chip is software, which defines what the chip can do.
Nvidia has not just designed chips around cutting-edge software. It has extended its dominance into the software stacks used by Cloud Czars to process AI workloads.
A Closer Look at NVDA Stock
NVDA stock isn’t what Intel (NASDAQ:INTC) was in the 1990s “WinTel” days. It’s what both Intel and Microsoft (NASDAQ:MSFT) were. It’s both the essential hardware and the basic operating system.
The question for investors is how long it can hold that position. Wintel lasted for two decades.
Clouds want to get around the Nvidia bottleneck to lower their costs, but in the short term they can’t. Now is when they have to lock-in their fattest profits from AI by positioning themselves as the place to process workloads.
Software is why they’re buying Nvidia chips with both hands, despite shortages and high prices.
In the process, cloud economics are being turned on their head. Clouds were supposed to define low-cost processing. Capital expenditures are still going up, but the number of data centers isn’t, because the money is going into upgrading what’s there.
Sell Signals
A good stock’s fall is always accompanied by commentary to the effect that its best days are behind it. Fear of missing out becomes fear of not getting out in time.
That’s happening now. Analysts are looking at charts, seeing selling, and telling investors to sell NVDA stock. Competitors are saying their stuff is just as good and plentiful. Cloud Czars are seeing supply and demand in better balance, cooling the market.
In gaming, Graphics Processing Unit cards from Nvidia and rival Advanced Micro Devices (NASDAQ:AMD) are no longer selling at a premium to list. Start-ups like Kneron are getting backing to build competing products.
Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon.Com (NASDAQ:AMZN) and Microsoft are all trying to diversify their supply chains, moving workloads to custom chips they design themselves.
For now, Nvidia’s virtual monopoly in cloud graphics processors, now called AI chips, seems secure.
CPUs and specialized chips are great for basic cloud workloads. But none of the Cloud Czars have yet replaced Nvidia’s stack for training Large Language Models or delivering results from them. Even Alphabet still needs Nvidia chips.
Nvidia has taken advantage, leasing its own servers to clouds based on its software stack. The best way for smaller players like Cloudflare (NYSE:NET) to compete with the Czars is to use a full stack of Nvidia hardware and software.
The Bottom Line
Most of the talk among Nvidia’s competitors and customers about getting around Nvidia’s virtual monopoly is just that, talk. So is the comparison between today’s AI boom, which is just starting, and the dot-com bubble of 2000, which I witnessed firsthand.
Nvidia’s CPU prices will come down, and supplies will rise. Taiwan Semiconductor (NYSE:TSM) and Intel are frantically building new manufacturing plants that can make the latest Nvidia designs.
That’s bullish for NVDA stock. Prices will decline, but volumes will increase to compensate. Meanwhile, the industry’s dependence on Nvidia’s software stack will only increase.
Buy the dip.
As of this writing, Dana Blankenhorn held LONG positions in AMZN, MSFT, NET, INTC, GOOGL, NVDA, AMD, and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
