1 Stock To Benefit from AI Datacenters

The $3.1 trillion chip giant NVIDIA Corporation (NASDAQ:NVDA) is much more than just a gaming chipmaker at the moment.

Realizing the potential of its chips in the artificial intelligence sphere, the company took a calculated step toward furthering its AI and related operations, and it has paid off in spades.

Investors who took a bet on NVIDIA five years ago are sitting on 2,300% gains. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up only 85% over the same period.

But with the surge in AI datacenters arguably there is more left in the tank to fuel higher prices for Nvidia.

How NVIDIA Became THE AI Leader

With more than 30 years of operating history, NVIDIA now serves around 40,000 companies. It’s been nothing short of a meteoric rise for Jensen Huang, Chris Malachowsky, and Curtis Priem, who collectively founded NVIDIA in 1993.

In the beginning, NVIDIA specialized in 3D graphics that are used in gaming and other multimedia forms. Aligning with this vision, in 1999, NVIDIA invented the graphics processor unit (GPU).

It wasn’t take long before the company realized that GPUs held far more potential than just gaming graphics and by 2006, it established the CUDA architecture, which opened up possibilities for parallel computing of GPUs.

Then, the advent of AI really catalyzed the stock to meteoric heights. It should be noted that NVIDIA’s leadership was optimistic about AI’s prospects far before the actual boom happened. 

When it became apparent that the GPU chips could be instrumental in training the large language models (LLMs) on which generative AI operates, NVIDIA instantly became an industry darling.

In fact, the LLM of ChatGPT, the generative AI tool that is taking the world by storm, is trained and run on thousands of NVIDIA GPUs.

NVIDIA’s Platforms Transformed Its Future

Looking back four to five years, NVIDIA had a very different operating structure than what it has now. Before we dive into the figures, let’s briefly look at the platforms that are important to the company’s evolution.

NVIDIA’s data center platform is based on computing workload like AI, scientific computing, and analytics. The company offers supercomputing platforms and servers, which have only grown in popularity over the years.

Next is its gaming platform, which provides software to enhance graphics. Up until a few years ago, this was the company’s go-to moneymaker.

In FY2020 (NVIDIA’s fiscal year ends in January), gaming made up more than 50% of the company’s top line. Data centers, on the other hand, made up 27% of its revenue (FY2020).

But, AI buzz was catching on as evident between FY2020 and FY2021 when data center revenue grew by 124%. The company had started reaping gains from its Mellanox acquisition, which had promised significant expansion in data centers.

At this point, NVIDIA’s Ampere architecture was also starting to catch attention, and led to 58% growth in data center revenues in FY2022. At that time, gaming still made up about 46% of the total top line, while data center was hot on its heels with a 39% revenue mix.

The Year It All Changed For NVIDIA

By FY2023 the revenue mix changed substantially when a combination of factors affected NVIDIA’s operations. Firstly, demand declines in China let to a gaming revenue fall of 27% year-over-year. 

By contrast, NVIDIA AI cloud service offerings were starting to become well-known and led to a 41% year-over-year jump in the data center top line. This segment also became the crowning jewel with a 56% share in revenue.

In FY2024, the trend continued with data center revenues growing by 217% from the prior year to $47.53 billion, commanding a 78% revenue mix. This was catalyzed by higher shipments of the NVIDIA Hopper GPU computing platform as companies scrambled to get a piece of the AI pie.

Meanwhile gaming showed a 15% increase, making up a more modest 17% of the total revenue.

It’s become ever more clear that NVIDIA’s primary focus has shifted to high-performance computing, although the gaming segment is also quite popular.

Looking ahead, the company is expecting further ramping of AI operations, with the acceleration of its H200 chips.

In March, its NVIDIA Blackwell platform was launched, with multi-technology chips, which are expected to be adopted by big tech names like Amazon Web Services, Google, Meta, Microsoft, and OpenAI.

What Should Investors Do with NVIDIA Now?

NVIDIA has scaled the heights from an obscure chip developer to industry darling, surpassing even the largest technology giants by market capitalization.

And while the AI hype persists and is unlikely to abate anytime soon, in spite of the prognostications from Goldman Sachs, NVIDIA is likely going to keep reaping benefits. There is competition in the industry, but none is as illustrious and enjoys as wide a moat as NVIDIA.

Remarkably, NVIDIA’s forward non-GAAP PEG sits quite nicely at just 1.06, which is lower than the 2.15 five-year average. Furthermore, analysts still expect the stock to grow by 11.5% and the cherry on top is it has a perfect Piotroski score of 9 that will appeal to fundamentally-focused analysts.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.