Nvidia earnings prove AI boom is for real

Nvidia's second-quarter earnings show just how lucrative it can be to sell powerful chips that help drive AI applications.

After delivering a revenue forecast that topped expectations, Nvidia shares soared to an all-time high of US$512 in August.

The chipmaker is up more than 240 per cent year to date, adding more than $800 billion in market value. This remarkable surge has solidified its position as one of the most important tech companies, boasting a valuation of over $US1.2 trillion.

The record-breaking second quarter for Nvidia was driven by increased AI chip demand, which led to a 101 per cent increase in revenues year-on-year. The company now foresees third-quarter sales reaching US$16 billion, almost tripling last year's figures.

For investors, the most exciting news is that the momentum is set to continue. As Nvidia's CEO Jensen Huang said while announcing results, "This is not a one-quarter thing, and the boom will last well into next year."

Not only this, he even backed up his optimism by announcing plans to buy back US$25bn of its stock in a further show of confidence.

Valuation makes more sense now

With every earnings report, Nvidia has eased investor concerns about its soaring valuation. The latest Q2 numbers and share buyback have given bulls even more reasons to justify its valuation, which now appears more reasonable.

Its price-to-earnings multiple has fallen to about 40 now from 63 before its May earnings report, indicating the company is growing its way into a cheaper valuation.

Of course, that doesn't mean Nvidia is cheap. It still trades well above the multiples of tech giants such as Apple and Microsoft.

Competition is yet to catch up

With a strong outlook and over 90 per cent market share of the AI chip market, Nvidia stands out as the best-positioned company on the AI front.

Its main rivals AMD and chip giant Intel are still far behind when it comes to producing the high-powered chips necessary to run large AI models.

Nvidia’s growth opportunities don’t stop at AI. Self-driving cars and cloud gaming are its next focus areas.

Nvidia has made big strides in the autonomous vehicle space with its smart driving platform and next-generation automotive-grade chip.

As such, Nvidia's chief rivals are not only other chipmakers or cloud-computing giants like Amazon Web Services, Microsoft Azure, and Google Cloud, who are beginning to develop GPUs themselves, but also Tesla.

AI rally is real

Nvidia's blockbuster quarter has sparked even greater investor interest in all things related to artificial intelligence.

While Nvidia has been a leading chipmaker in the AI gold rush, companies like Broadcom, AMD, Marvel Technology, Palantir, and C3.ai are gaining traction for their potential in generative AI applications.

The markets also continue to reward companies with exposure to AI. Even smaller players like C3.ai and Palantir have more than doubled in market value this year.

Beyond the hype

The hype around generative AI has shown no sign of slowdown ever since the launch of OpenAI’s ChatGPT in November last year. However, whilst Nvidia's growth story proves AI demand is real, the potential risks to the narrative are also real.

While macroeconomic uncertainties, geopolitical risks, and the looming threat of a global recession could potentially disrupt its growth momentum, the chipmaker's most significant risk lies in the challenge of securing supplies.

Nvidia relies on Taiwan for chips and all its advanced AI semiconductors, which power ChatGPT, are made by TSMC.

Stronger curbs against China could also expose it to potential revenue volatility as the country accounts for nearly 25 per cent of its data centre revenue.

The AI barometer

In a short period, Nvidia has become the bellwether of the AI industry, with its forecasts providing insights into the broader direction of the tech industry and where the big investments are going.

However, its growth hinges on the widespread economic growth narrative that AI will not only enhance productivity but also unlock trillions in economic value.

Investors should bear in mind that this holds only if the AI gold rush manages to sustain itself and expand beyond the current market leaders like Nvidia and Microsoft to the larger tech industry.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.