Why Investors Shouldn’t Underestimate NVIDIA
NVIDIA (NASDAQ: NVDA) is a leading chip provider for businesses that need to process huge amounts of data with artificial intelligence (AI) workloads. Its graphics processors facilitate the technologies consumers interact with every day, including recommendation systems, AI-powered chatbots, and more.
After a sharp rise in prices over the past year, stocks appear expensive at a price-to-earnings ratio of 89, but based on recent growth and announcements made by NVIDIA on its Investor Day on April 12. , it’s hard to call NVIDIA expensive. The stock could have legs over the next five years and beyond as it begins to offer software solutions to businesses.
NVIDIA leads the AI revolution
NVIDIA’s revenue and earnings per share have grown significantly over the past five years, fueling a 1600% share price increase during that time. Since fiscal 2017, cash flow from NVIDIA operations has grown at an average annual rate of 37% per year.
NVIDIA has long dominated the gaming graphics card market, and just recently investors gave NVIDIA a big boost after unveiling its Grace processor, the company’s first mainframe designed for data centers.
But what some investors might miss about NVIDIA’s business is that it’s not just high-powered chips that are fueling its growth. In addition to chips, NVIDIA offers software and applications, which is part of the reason why the profits are piling up.
NVIDIA builds platforms that combine software and hardware that essentially make it easier for businesses to use AI. It’s a bit like Microsoft transition from MS-DOS to Windows in the 1980s, ushering in a wave of new consumers wanting to use a PC. In a way, NVIDIA is positioning itself as the Microsoft of the AI revolution.
Here are some examples of what NVIDIA has to offer:
- NVIDIA recently unveiled NVIDIA AI Enterprise. This platform makes it easier and faster for companies to implement AI in their applications. NVIDIA developed AI Enterprise in partnership with VMware, one of the leading providers of cloud infrastructure services used by 70% of businesses globally.
- NVIDIA Jarvis is a software suite that provides businesses with the tools to use conversational AI, speech recognition, and text-to-speech capabilities.
- NVIDIA Omniverse is an interactive platform that allows graphic designers to virtually collaborate with other team members to create 3D objects.
NVIDIA is widening its competitive gap with these platforms. Adding software tools in addition to hardware leads to a much closer relationship with customers than just selling a chip. After all, there is always the risk that a competitor will make a better chip, because Advanced micro-systems demonstrated by taking market share of Intel.
The chip as a service has arrived
Our opportunity in the chipset and systems market is significantly greater with NVIDIA AI and NVIDIA Omniverse.
– CEO Jensen Huang at NVIDIA 2021 Investor Day.
Looking at what NVIDIA charges customers for AI Enterprise, it’s clear why management thinks its AI software platforms represent a multibillion-dollar opportunity.
For AI Enterprise, NVIDIA will charge a license fee of $ 3,595 per CPU socket, and VMware has over 300,000 enterprise customers. It is a potential market of 8 million processors per year. Additionally, NVIDIA offers a subscription service for $ 899 per year per license.
Another big opportunity is NVIDIA DRIVE, which is the centerpiece of NVIDIA’s push into the self-driving car market. DaimlerMercedes-Benz made an agreement with NVIDIA last year to use the NVIDIA DRIVE AGX Orin chip to deploy autonomous capabilities to the Mercedes fleet from 2024.
Like AI Enterprise, NVIDIA DRIVE could generate a substantial amount of recurring revenue for NVIDIA. Mercedes will build next-generation cars that run on system software like a computer. The car will receive live updates, just like downloading a new update for your phone.
The important part of the deal is that NVIDIA has entered into a revenue sharing agreement with Mercedes-Benz, in which it will generate revenue for every software sale. Car owners will be able to purchase new software features that enhance the driving experience while keeping the car up to date with the latest autonomous features. With millions of cars on the road, this opportunity could represent something big over time.
The opportunities are huge in AI software
The in-car services market is currently estimated at $ 5 billion, but could grow several times larger, depending on the number of 100 million cars currently in circulation on NVIDIA DRIVE. As a perspective, NVIDIA’s revenue for fiscal 2021 was $ 16.7 billion. Of course, this is just an opportunity in transportation. The data center alone represents a $ 100 billion opportunity, according to NVIDIA.
It is for these reasons that I would not underestimate NVIDIA, even at its current expensive price. NVIDIA AI is present in every cloud and is positioned to be the technological backbone of all sectors of the global economy. All of this points to new highs in long-term stock prices.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.