Nvidia (NASDAQ: NVDA) has grown by leaps and bounds over the past few years. Thanks to the company's dominance in the artificial intelligence (AI) chip market, its quarterly revenues and profits have been climbing at triple-digit percentage rates year over year. The company also boasts a gross margin of over 70%. The market has responded to these amazing results by bidding the stock up by more than 2,400% over five years.
In fact, the stock climbed so high that the company engaged in a stock split this spring to bring its price down from more than $1,000 to about $120 -- a move designed to make it easier for retail investors to buy in.
All of this sounds great, but current shareholders and potential investors remain worried about one thing -- future growth. Competition in the AI chip market is on the rise, and some are concerned that Nvidia's pace of growth will start to taper off as cheaper options become more widely available. But a recent shocking move by Tesla Chief Executive Officer Elon Musk and Oracle co-founder Larry Ellison actually signals that Nvidia still has enormous growth ahead, and should ease investors' fears.
The GPU's speed and efficiency
First, a quick summary of Nvidia's path so far. The company makes graphics processing units (GPUs), a type of chip that processes multiple tasks simultaneously. Originally, GPUs were largely destined for use in the video gaming market, but it became clear that their speed and efficiency made them valuable for a host of other computing uses. As companies over the past few years have turned their attention to AI, which demands precisely the sort of high-speed parallel processing power that GPUs can bring to bear, Nvidia took center stage -- and the rest is history.
Today, companies have some choices when they need high-powered chips to launch an AI program or set up a data center -- other players, from Intel to Advanced Micro Devices, make rival AI chips to power such tasks as the training and inferencing of AI models. Some companies, such as Meta Platforms, are even making some of their own chips to power their AI workloads. This is why investors' biggest worry about Nvidia right now is the growth of competition in the market.
Now, let's consider the recent move made by Musk and Ellison. The two billionaires took Nvidia CEO Jensen Huang out for dinner and "begged" him for more GPUs, according to a report in Fortune. Ellison said he and Musk said to Huang, "Please take our money."
Why would a pair of powerful CEOs have to beg for GPUs instead of just ordering more? Demand is still surpassing supply even as Nvidia works nonstop to keep up with it. But instead of turning to other suppliers, Ellison and Musk decided to talk with Huang and plead their case.
The early stages of an AI build-out
Now let's consider what this means for Nvidia. First, it shows that the company's revenue growth should continue at a high level -- Ellison, Musk, and others are still in the early stages of their AI build-outs, and everyone hopes to reach the finish line first with a winning AI product or platform. So, demand for AI chips is going strong.
Next, and the most important point here, is that Nvidia doesn't have to worry about the competition yet. Yes, some companies are building their own chips in addition to using Nvidia's -- but demand is so high that at this point, Nvidia can't meet 100% of everyone's needs, and its customers have recognized this and planned ahead. In other instances, less expensive chips may be just fine for certain tasks.
But, overall, what Ellison and Musk did illustrates exactly how important Nvidia's GPUs are in the AI landscape -- and the fact that major companies would rather beg Huang for more than turn to rival hardware.
This is excellent news for Nvidia's shareholders today, and considering its strengths in innovation, it's good news for those who plan to hold onto the stock for the long term, too.
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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. Adria Cimino has positions in Oracle and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Nvidia, Oracle, and Tesla. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
This Shocking Move by Elon Musk and Larry Ellison Signals Enormous Growth Ahead for Nvidia (and Should Eliminate Its Shareholders' Biggest Worry) was originally published by The Motley Fool