There are no two ways about it: The dawn of the artificial intelligence (AI) revolution in early 2023 has been a windfall for chipmaker Nvidia (NASDAQ: NVDA). The company pioneered the graphics processing units (GPUs) that have become the gold standard for a variety of use cases by providing the computational horsepower needed to underpin video games, data centers, and even earlier versions of AI.
Generative AI went viral early last year, with Nvidia at the heart of what many are calling the next industrial revolution. The results have been striking: Nvidia stock is up more than 800% since the start of 2023 and hovers less than 2% off its all-time high (as of this writing) -- but it's been a bumpy ride. Nvidia stock lost as much as 27% during the four weeks starting in early July but has rebounded vigorously, gaining nearly all that back over the past month.
Causing the recent decline were fears that demand for AI could dwindle, and a great deal of future growth was already baked into the stock price. That said, there's mounting evidence that answers the question: Is it too late to buy Nvidia stock?
Faltering demand, or the calm before the storm?
What distinguishes generative AI from its predecessors is the need for not only massive amounts of data, but also the corresponding computational horsepower needed to parse the data. When it comes to AI-centric processors, Nvidia is without equal, controlling an estimated 98% of the market in 2023, similar to its share in 2022, according to semiconductor analyst company TechInsights. This dominance put Nvidia in pole position when generative AI burst on the scene.
The unprecedented demand fueled triple-digit revenue and profit growth for Nvidia for five successive quarters. So, when the company forecast only 79% growth for its fiscal 2025 third quarter (which ends in late October), some investors saw the writing on the wall. They concluded that demand was ebbing and they headed for the exits, but that move was likely premature -- and costly. The evidence is growing that demand for AI continues unabated.
Super Micro Computer, commonly called Supermicro, provided one piece to the demand puzzle on Monday. In a press release, the company revealed that it had delivered more than 2,000 direct liquid-cooling (DLC) rack systems since June and was currently shipping more than 100,000 GPUs per quarter. Shipments of that magnitude suggest that demand for Nvidia's GPUs remains robust.
Nvidia CEO Jensen Huang provided some boots-on-the-ground commentary as well. In an interview late last week, the chief executive said that demand for Blackwell -- the company's next-generation AI platform -- is "insane." He called this the "first wave of AI," which started with the modernization of $1 trillion worth of existing data centers, upgrading them with chips capable of processing generative AI. Huang went on to say that the next phase -- the "biggest wave of AI" -- will involve "companies using AI to be more productive." These comments suggest that the AI boom has only just begun.
Furthermore, Nvidia recently expanded its partnership with global IT consultancy company Accenture to help enterprise companies "rapidly scale their AI adoption." To that end, Accenture launched the new Accenture Nvidia Business Group, which will be staffed by 30,000 business professionals to help customers with "process reinvention, AI-powered simulation, and sovereign AI." Accenture noted in the press release that generative AI drove $3 billion in bookings in its recently completed fiscal year and shows no signs of slowing.
Finally, data provided on Wednesday by Taiwan Semiconductor Manufacturing, commonly called TSMC, left no question about the ongoing demand for AI. The company released its September Revenue Report, which reported quarterly revenue of 759.7 billion New Taiwan dollars ($24.6 billion), increasing 39% year over year and coasting past Wall Street's consensus estimate of NT$748. Nvidia is one of TSMC's largest customers, accounting for roughly 11% of sales last year. This suggests that AI-related demand remains strong for Nvidia as well.
The evidence is clear
Nvidia investors have been on a non-stop thrill ride since early last year. The company's fiscal 2025 second-quarter results help illustrate its success. For the fiscal 2025 second quarter (ended July 28), Nvidia delivered record revenue that grew 122% year over year to $30 billion, fueled by record data center revenue of $26.3 billion, up 154%. Profits also soared as diluted earnings per share (EPS) of $0.67 surged 168%.
Nvidia won't report its fiscal third-quarter results until late November, so we won't know for sure until then. However, if the latest developments are any indication, Nvidia should have another strong showing in the works.
The company's forecast is calling for revenue of $32.5 billion, which would represent year-over-year growth of 79%, with a corresponding increase in profitability. While that's slower than the triple-digit growth investors had become accustomed to, it's remarkable nonetheless.
Then there's the matter of Nvidia's valuation. At 62 times earnings, it certainly appears expensive -- at least at first glance. However, Wall Street is forecasting EPS of $4.02 for Nvidia's fiscal year that begins in January. That works out a forward price-to-earnings (P/E) ratio of 33, which is only slightly higher than the multiple of 30 for the S&P 500.
For me, the evidence is clear: Nvidia stock is still a buy.
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Danny Vena has positions in Nvidia and Super Micro Computer. The Motley Fool has positions in and recommends Accenture Plc, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2025 $290 calls on Accenture Plc and short January 2025 $310 calls on Accenture Plc. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Nvidia Stock? Evidence Is Piling Up That Provides a Compelling Answer. was originally published by The Motley Fool