Can Nvidia StillGenerate Wealth for Millionaire Investors?
With increases of around 29,000% since 2014, Nvidia (NVDA -1.68%) has been prominent as a millionaire-maker stock. Early investors could have transformed modest investments into substantial fortunes.
However, history doesn't guarantee future success. So let's analyze indicators to see if this influential tech company is still a good investment.
A history of fluctuations
While generative AI has been a recent success for Nvidia, its opportunities were limited before late 2022, when OpenAI's ChatGPT saw widespread adoption. Prior to that, the company experienced periods of growth followed by decline as its advanced graphics processing units (GPUs) were used in various booming industries.
In the early and mid-2000s, Nvidia focused on video gaming. However, the rise of digital currencies like Bitcoin led to surging demand for its GPUs for blockchain mining. After peaking, both of these markets stabilized and declined. Together, they accounted for less than 10% of the company's fiscal second-quarter sales.
The data center segment now accounts for over 88% of its sales. Although Nvidia does not provide specific product breakdowns, the majority of these sales likely come from advanced AI chips like the H100 and H200, used for running and training large language models (LLMs). If demand for LLMs decreases, much of Nvidia's recent growth will likely shrink.
The bear perspective
In the most unfavorable scenario, Nvidia's AI-driven growth is approaching a significant downturn or even collapse. Despite the company's impressive second-quarter revenue growth of 122% to $30 billion, it may be based on an unsustainable AI arms race resulting from tech companies overspending on chips to avoid falling behind.
A potential major player in this scenario is Meta Platforms, one of Nvidia's largest clients. In 2024, Meta expects to spend around $38 billion to $40 billion on capital expenditures, primarily on Nvidia GPUs. While CEO Mark Zuckerberg is optimistic about the opportunity, it remains unclear how Meta plans to generate profits.
In contrast to tech giants like Amazon or Alphabet, Meta doesn't have a cloud platform to offer its computing power for rental. Moreover, its flagship AI model, Llama, is open source and free, making monetization challenging.
The situation is reminiscent of Zuckerberg's previous ill-fated venture: a virtual reality concept called the Metaverse, which cost around $46.5 billion with few discernible benefits.
Meta isn't the only tech company grappling with uncertain AI business plans. Electric vehicle manufacturer Tesla is also investing heavily in Nvidia chips for its Dojo supercomputer, a project CEO Elon Musk admits is a gamble.
Many of Nvidia's key clients have questionable AI strategies. Shareholders may eventually demand a reduction in capital spending, leading to a decrease in chip demand.
The bull outlook
Despite valid concerns about the stock following its strong performance, the long term may not be entirely dismal. Analysts expect significant growth in the AI industry, with PwC estimating it will add $15.7 trillion to the global economy through productivity and consumer demand stimulation by 2030. If this expectation holds, Nvidia's millionaire-maker journey may be far from over.
In the best-case scenario, the main obstacle to AI monetization could be technological limitations. Addressing this challenge is within Nvidia's capabilities, such as through the development of more efficient chips. As chips become faster and less power-intensive, running LLMs will become cheaper, reducing the profitability threshold.
Is Nvidia a millionaire-maker stock?
With a market cap of over $3.5 trillion, Nvidia is currently the largest company on the planet. However, reaching multibagger potential seems unlikely from its current position. Predicting the future is challenging, but the bear case appears more plausible based on fewer assumptions.
At present, many of Nvidia's clients aren't generating sufficient revenue to justify their current AI investment levels. While Nvidia's innovation in chips could trigger a new growth phase in the short term, long-term investors might want to wait for a price correction before considering an investment in the stock.
Given the ongoing AI industry growth, investors might consider diversifying their finance portfolio by investing in companies like Nvidia that are leaders in this sector. However, it's crucial to closely monitor market trends and potential challenges, such as decreasing demand for large language models or unsustainable spending on AI-related chips by tech giants.
Investors should also stay informed about the financial health of Nvidia's major clients, like Meta Platforms, as their strategies and investment in Nvidia GPUs could significantly impact the demand for the company's products. By keeping a watchful eye on these factors, investors can make informed decisions about whether Nvidia continues to be a promising investment opportunity for earning substantial returns on their money.
