Nvidia‘s (NASDAQ:NVDA) still growing its earnings at 600% and the stock continues to rise. But after a huge increase in the company’s share price, some investors are looking elsewhere for opportunities in the artificial intelligence (AI) space.
I think this is a mistake. While there might be some excellent opportunities in companies that are going to supply data and power to the AI industry, I think the huge investments in data centres that require Nvidia’s GPU chips are set to continue for some time.
Demand
Nvidia’s recent success comes down to two things – supply and demand. And there are encouraging signs on both counts.
On the demand side, the company’s customers have huge resources available. The likes of Microsoft, Amazon, and Meta Platforms are able to spend big and keep doing so.
Furthermore, CFO Colette Kress noted last week that AI is starting to attract the attention of nation states. As a result, Nvidia’s customers now include entire countries.
It’s natural for investors to wonder how big the market for AI might be. But a look at the potential customers indicates they might not have to worry any time soon.
Supply
If the demand side of the equation looks positive, what about supply? Nvidia has a clear lead in the GPU industry, but the question is, how long this can continue?
At the moment, there are clear reasons for optimism. The company’s latest chip – Blackwell – is set to launch this year, maintaining the firm’s market position.
Management’s also suggesting there’s more to come next year. So the AI applications that rely on the most sophisticated GPUs are likely to need Nvidia for some time.
Despite this, the price-to-earnings (P/E) ratio the stock trades at is falling steadily. Right now, Nvidia shares trade at a forward P/E ratio of 29, which is slightly lower than Amazon.
Risks
Nvidia’s competitive position looks secure. But the semiconductor industry is one where leadership can change rapidly – as Intel demonstrates.
Despite spending roughly 10 times as much on research and development, Intel has totally lost what was a dominant market position to rival AMD. There are a few reasons for this.
The most obvious is the company allocated its capital poorly, focusing in the wrong areas. It also probably focused too much on dividends and share buybacks at the cost of innovation.
I’m not saying Nvidia’s likely to do this. But the industry’s one where any mistake could be costly – even for a company that’s clearly out on its own with no obvious competitors.
Is it too late to buy?
Investors need to think carefully before deciding whether or not to buy the shares. The supply and demand equation looks good right now, but there’s more to investing than this.
Gauging what the industry will look like 10 or 20 years from now is difficult. But it’s not at all obvious to me that the stock has reached a level where the moment to buy has passed.
