Did you know that just one company was responsible for more than 30% of the S&P 500's growth for the first half of this year? Take a wild guess at what company you think it is. Yes, indeed, it's Nvidia (NASDAQ: NVDA). The chipmaker is the tide rising all boats.
It makes sense. Nvidia's technology is driving the artificial intelligence (AI) boom, enabling a technological revolution that some believe could be as transformative as the internet itself. Its massively powerful chips are a hot commodity, and that's putting it lightly. With the rest of big tech lining up at its door to get their hands on Nvidia's latest iteration, the company more than tripled its year-over-year revenue for the last three quarters.
Now, all eyes are on the company's next earnings report, to be released August 28. Expectations are high. So, with the release fast approaching, is it a good time to hop on board the Nvidia train? Here are three reasons the stock still looks strong.
1. Capex from the rest of Silicon Valley is accelerating
There was some trepidation in tech as a whole when the latest round of earnings reports kicked off. Although the numbers generally showed positive growth, they fell short of what many investors hoped, with the notable exception of Meta posting monster revenue growth. A major concern was the growing capital expenditures (capex) from most of Silicon Valley, especially from companies like Alphabet and Microsoft that build and operate the gargantuan data centers largely responsible for the internet as we know it.
These cloud operators spent huge sums of money in the last few years upgrading their data centers to be capable of training and running generative AI systems, and their spending is not slowing down. There's an arms race happening in Silicon Valley and no one wants to be left behind. Look at the uptick in capex for Alphabet and Microsoft over the last three years. Notice the big jump right as AI took over the news cycle in 2023?
This capex growth is only continuing and even accelerating. Alphabet spent around $32 billion on capex in 2023. It's on track to spend about $50 billion this year. This is great news for Nvidia, who is on the supplier's side of many of these infrastructure orders. Yes, not all of this revenue is flowing into Nvidia's coffers, but a sizable portion is. There will continue to be a need to upgrade and expand these data centers for some time, and Nvidia will be there to meet that need.
2. Nvidia has a new revenue stream and it could be substantial
The hype around Nvidia's technology is almost entirely focused on its chips. Although this will continue to be the company's bread and butter, Nvidia is expanding its product offerings into a critical category: networking. In simple terms, data needs to travel. Traditionally, data centers used ethernet-based networks to handle this, but AI can create too much data too quickly for legacy systems to handle. There are other technologies that can be used instead of ethernet, but retrofitting data centers with this is extremely expensive.
That's where Spectrum-X comes in, Nvidia's new ethernet-based networking platform for AI. Single data ports can handle data speeds up to 800 gigabits per second with low latency, and they are still backward-compatible with slower Ethernet standards. This allows certain components to be upgraded without completely overhauling the data center's network infrastructure at once.
Now, Spectrum-X is not the only solution like this on the market. Broadcom already has a similar offering, for example, but I think Nvidia is likely to gain significant market share here because its solution will "play nice" with Nivida chips. The components will be optimized to work at maximum capacity when used together. Nvidia is building an ecosystem that will reward clients for sticking with its products. This could easily be a multi-billion dollar revenue stream within a year or two.
3. Nvidia announced delays in its latest chip, but I doubt it will move the needle
Nividia committed itself to updating its flagship AI chip every year. That's quite a tall order and leaves little room for error. The company already seems to have slipped up.
After a flaw was discovered in its Blackwell AI accelerator chips, the company announced there would be a delay in rolling them out. I think this is unlikely to have any significant impact on the company's bottom line. Its Hopper chips, which the Blackwells are intended to replace, are capable of meeting the current needs of its hyperscaler customers. Their sales will probably make up for any potential loss from the delayed Blackwell rollout.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Reasons To Buy Nvidia Stock Before August 28 was originally published by The Motley Fool