While there is a lot of concern around tech titans like Nvidia driving much of the returns in the S&P500 and Nasdaq composite, this will probably remain the case for the time being. Below are three reasons why the chipmaker will maintain its dominance in not just chip technologies but share appreciation as well.
CUDA and Nvidia Stock
Generative artificial intelligence catapulted into the cultural zeitgeist in 2023, but it was in fact years in the making with investments in high-grade startups and technological innovation.
Nvidia has been planning for the emergence of AI for years now. Wayback in 2006, Nvidia introduced the Compute Unified Device Architecture programming model, which opened the parallel processing capabilities of GPUs for general-purpose computing.
This essentially paved the way the use of GPUs in AI, as it allowed for the acceleration of compute-intensive applications.
Even today, the chipmaker’s advanced developer’s software kit allows its GPUs to perform better than competitors. It’s not just the hardware that makes a GPU perform well; rather, the software plays an even crucial role.
Nvidia has also built a large and vibrant developers’ community around its CUDA software that aids in the development of the firm’s AI-focused GPU chips.
Nvidia’s Strong Pricing Power Remains Intact
There is much discussion surrounding Nvidia’s effective monopoly on the AI chip space. That definitely holds true and will likely do so for the time being.
Competitors, namely Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:AMD) have worked hard to develop their own GPUs for servers that will be leveraged in training large language models, but even the latest announcements from these companies will not have Nvidia or its shareholders scared.
In particular, AMD’s MI300 chip series in competing with Nvidia’s H100 and H200 chips, and most recently, AMD announced the MI325X chip, which will launch later in the year and should perform 30% better than the H200 series.
However, Nvidia is set to release a new series of GPUs dubbed “Blackwell” that will put Nvidia, again, ahead of its semiconductor peers. Intel is not in good shape either with its Gaudi 3 AI accelerators that are on par with Nvidia’s H200 series but will not enter the market until the second half 2024.
With Nvidia’s GPU embodying all the high-end processing capabilities, the chipmaker will largely keep its pricing power in the market.
Valuation is Key
Market valuation is another key aspect to deciding whether or not Nvidia stock is a worthwhile investment. When comparing, for example, forward price-to-earnings multiples of Nvidia with, say, AMD and Intel, the latter two semiconductor firms appear cheaper.
As of the end of last week’s trading session, Nvidia boasted a P/E multiple of 43.6x forward earnings, while AMD, by comparison, sitting at 40.0x forward earnings and Intel 24.5x forward earnings.
The tricky part about relying on these valuation metrics is because they’re based on projects. What has been clear over the past 12 months is that Wall Street has not become better at predicting Nvidia’s revenue and earnings growth.
The chipmaker has reported sizable earnings beats in the past several quarters, which puts Wall Street’s earnings estimates in doubt as well as the firm’s relatively higher valuation multiple.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.