Among major tech stocks, Nvidia (NASDAQ:NVDA) has undoubtedly gained the most from the emergence of the generative AI mega-trend. Because of accelerating adoption of generative artificial intelligence applications, NVDA stock has rallied 195.6% year-to-date.
However, following the chip stock’s bolt to prices north of $400 per share, resulting in the company joining the “trillion dollar club” (market cap of $1 trillion or more), many investors are concerned that the “AI mania” surrounding this stock is petering out.
My view? They may come in at a more gradual pace from here, but I wouldn’t assume that shares have topped out, and it’s all downhill from here. The reasons for this are twofold.
First, Nvidia has more than one way to capitalize on the aforementioned secular growth trend. Second, there’s another factor that may not yet be fully reflected in the company’s stock price.
NVDA Stock and AI: Substance, Not Hype
While investors have possibly gone overboard pricing-in AI potential in other semiconductor stocks, it’s important to note that the big run-up in the price of Nvidia shares is based as much on “AI substance” as it is on “AI hype.”
Instead of merely pricing in the potential of this company ultimately generating substantial sales/earnings from the sale of AI chips, Nvidia has already done so.
As seen in its most recently released results, AI-related chip sales enabled the company to report double-digit sequential sales growth, even as demand in other end-user markets (such as gaming) remained in a slump.
As I noted last month, besides delivering strong earnings last quarter, Nvidia also provided a massive upward revision to its guidance for the current fiscal quarter (ending July 2023).
Instead of expecting $7.2 billion in revenue, the company expects sales to top $11 billion, thanks to soaring AI chip demand.
With its overall story changing in such a dramatic way, the continued rally with NVDA stock since this earnings report/guidance update dropped on May 24 has been justified. Even better, alongside this catalyst that is still playing out, another strong AI-related catalyst is emerging.
More Than Just Chips
As par for the course with any strong performing stock, there are some taking a contrarian view on NVDA. These Nvidia skeptics have yet to be vindicated. They continue to lie out the bear case, which hinges heavily on shares being in a bubble on the verge of popping.
Why? In the view of NVDA stock skeptics, the market is overestimating the potential size of the AI chip market. These skeptics also argue that there’s an enormous risk that competition will start heating up for this AI chip leader, negatively affecting growth and margins down the road.
However, Nvidia’s rivals remain far from being major challengers, much less competitive threats, to the company’s AI dominance.
Even if AI chip demand growth slows, keep in mind that this company has another way to capitalize on the rise of artificial intelligence. That would be through its newly launched DGX cloud platform.
DGX Cloud enables Nvidia to turn the AI computing power of its chips into a recurring revenue stream. According to Raymond James analyst Srini Pajjuri, this “AI as a service” platform represents “a significant long term opportunity” for the tech giant.
The Verdict
With this additional AI catalyst in mind, those betting that disappointment will knock NVDA lower may be the ones more likely to experience disappointment (not to mention, big losses).
This is especially the case, when you consider there’s yet another earnings-booster in store. I’m talking about the recovery of demand for Nvidia’s chips among end-users in areas like gaming and PCs.
Demand in these areas softened last year, and has stayed so up until now. However, as macro challenges fade, demand stands to bounce back in a big way.
Putting it all together, it’s easy to see why analysts are forecasting a big earnings jump not just this fiscal year (ending January 2024) but over the next two fiscal years as well.
Poised to stay a winner, enter/add to a NVDA stock position at current prices.
NVDA stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
