AI chip giant NVIDIA (NASDAQ:NVDA) is one of the world’s most valuable companies and most popular stocks. Valued at well over $2 trillion, NVIDIA boasts a 5-year return of over 2,500%.
Even after its recent decline following a government subpoena, NVIDIA still commands an enormous market capitalization.
With shares trading at about 50x earnings and 27x sales, NVIDIA will have to continue growing at a fairly aggressive pace to justify investors’ expectations, regardless of the recent pullback.
So, why is NVIDIA so popular? The primary reason for NVIDIA’s popularity is its leading role in the market for AI chips.
This year has seen the company’s share of the GPU market rise from an already impressive 80% to 88%, showing just how much the market favors NVIDIA’s chips.
It’s also worth asking and why have both retail and institutional investors been banking on the company’s ongoing growth with such confidence?
NVIDIA Is the Dominant Leader in AI Chips
Though there is plenty of room for innovation in the rapidly evolving AI chip world, NVIDIA’s market dominance has produced an extremely wide moat.
NVIDIA’s economic prowess in the AI world, however, extends beyond its physical chips. The company’s GPU programming software, known as CUDA, is the industry standard that practically all AI engineers initially learn.
Even if another company came up with better, less-expensive chips, therefore, it would also have to create a ubiquitous programming environment to rival CUDA before presenting a serious threat to NVIDIA’s market position.
A final component of NVIDIA’s moat is its network of relationships with some of the world’s largest tech companies. The company’s four largest customers are Microsoft, Meta, Amazon and Alphabet.
While these companies are also working to develop AI chips of their own, none of them is in a position to compete with NVIDIA as a chipmaker.
Since these tech giants are continuing to build out their AI capabilities by buying NVIDIA’s hardware, the company can likely count on a steady flow of business from the world’s leading tech companies for the foreseeable future.
AI Projections Suggest a Long Period of Prosperity
Of course, NVIDIA’s position at the forefront of the AI chip industry is only useful if the technology continues to grow and deliver returns for users.
Fortunately for NVIDIA, many analysts believe that AI is still in its infancy as both a technology and a market. By 2030, the global AI market is expected to reach about $827 billion, more than four times its current size.
As companies race to develop more and more complex AI models to take on more complicated tasks, demand for NVIDIA’s chips will naturally continue to rise. The market for AI chips alone could be worth over $200 billion by 2030.
Provided no significant challenger emerges to compete with NVIDIA, it seems probable that the company will continue to capture a significant portion of this fast-growing market.
Demand for faster processing also gives NVIDIA the opportunity to innovate and produce new generations of AI chips.
One such new chip, the company’s Blackwell GPU, is expected to be released later this year. This chip, meant specifically to provide computing power for generative AI, can support AI models with up to 10 trillion parameters at a fraction of the cost and energy usage of older equivalents.
As new breakthroughs in rapid computing continue to be made, NVIDIA will likely have the ability to routinely provide updated chips and benefit from strong demand for the newest and best processors.
Exceptional Fundamental Performance
While being at the cutting edge of a fast-growing technology is good for NVIDIA’s future growth prospects, it is also worth noting just how well the company has performed up to now. In 2019, the company generated about $10.9 billion in revenue and $2.8 billion in net income.
In just five years, those numbers have exploded to current trailing 12-month totals of $96.3 billion and $53.0 billion.
Impressively, the company’s growth still doesn’t seem to be slowing down. In its Q2 report, NVIDIA reported 122% year-over-year revenue growth and 168% net income growth.
With both sales and profits still growing and the market for AI chips remaining strong, NVIDIA still appears to have a long growth runway in front of it.
In addition to generating massive growth, NVIDIA has become progressively more profitable as it has scaled up.
In the last full fiscal year, the company reported a net margin of 55.0% and a return on equity of 113.5%. For reference, Microsoft, known for its high margins as a software and cloud computing giant, delivered a net margin of 36.0% over a comparable period.
Just as impressive as the company’s performance is the fact that it has been able to scale so quickly while maintaining a nearly ironclad balance sheet.
NVIDIA’s debt-to-equity ratio is just 0.15. As of Q2 reporting the company had about $34.8 billion in cash and cash equivalents, up from $26.0 billion at the start of the year. Long-term debt, by comparison, totaled just $8.5 billion.
Potential as a Long-term Dividend Growth Play
While most investors are eyeing NVIDIA as a massive growth play, there’s also a surprisingly strong argument for the stock as a dividend investment. At the moment, the company pays a minuscule dividend of just $0.04 per share annually.
With its earnings rising quickly and ample cash on hand, though, NVIDIA may eventually reach a point at which it is no longer able to reinvest all of its cash productively into its business.
If and when that time comes, the company could allocate much larger sums of cash to share buybacks and dividends. Eventually, NVIDIA shares may well be good dividend income producers as the company matures.
A Charismatic CEO With the Ability to Sell NVIDIA’s Story
A final piece of NVIDIA’s popularity is its charismatic co-founder and CEO, Jensen Huang.
As the CEO of the largest AI chip maker in the world, Huang is often treated as a go-to source for predictions about the AI market and wisdom on corporate leadership.
Huang’s own bullishness on AI and his ability to tell his company’s growth story well may account for some of NVIDIA’s popularity, especially among retail investors.
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