The Nvidia (NASDAQ:NVDA) share price is up 66% in the last six months. Big investments in its customers, however, means its sales growth might not be as strong as it seems.
But while some analysts are hearing echoes of the dotcom crash, I’m not convinced. In fact, I think this is a move that could turn out to be brilliant over the long term.
Nvidia’s investments
A good example is OpenAI. Sam Altman’s firm plans to build up to 10 gigawatts of AI infrastructure over the next few years using Nvidia’s hardware.
The trouble is, the company doesn’t make any money (and doesn’t expect to do so any time soon). So analysts are wondering how it’s going to pay for this investment.
At the same time, Nvidia is set to invest $100bn into OpenAI in a deal tied to the deployment of the data centres. And it has similar deals with CoreWeave and other smaller businesses.
Nvidia says the cash it invests is not being used to finance its own sales. But analysts who are getting concerned about an AI bubble are starting to wonder whether this is eerily familiar…
Is this a problem?
During the dotcom boom, AOL was a major online advertising company. But as sales momentum began to slow down, it started resorting to techniques known as circular financing.
The firm bought equity stakes in smaller businesses, which then used that cash to buy advertising through AOL. As a result, the firm’s revenues got far beyond the underlying economic reality.
We all know how that story ended. And analysts are concerned something similar might be going on with Nvidia and its investments in OpenAI and CoreWeave.
That’s why Nvidia is being explicit in pointing out that the cash it invests isn’t being used to finance sales of its GPUs. And I agree as I think its investments might serve a more fundamental purpose than boosting the stock price.
Long-term prospects
When it comes to AI chips, the competition isn’t just about performance. The company’s software platform – CUDA – also makes it very difficult for a customer to switch to a rival’s chips.
CUDA’s importance is something I’ve underestimated in the past. But it’s the reason it might be in Nvidia’s long-term interest to find ways to get customers on board in the short term.
The prospect of long-term recurring revenues means investments today might pay off handsomely in the future. And that’s why I think Nvidia’s current approach makes a lot of sense.
If I’m right, investors might look back on Nvidia’s deals as a key point where the company accelerated away from its rivals. I think the stock is definitely worth looking at.
AI bubble?
Nvidia is clearly working hard to boost sales beyond where they might be organically. The only question is whether this is something investors need to worry about.
In the short term, I think the answer is yes. If demand falters, the stock could crash (and I mean crash) and this is a risk in the near future.
Looking further ahead though, I’m much more positive. I think AI as a whole has a lot of growth ahead and switching costs are high, which is why I think investors should still consider buying the stock.
