Artificial intelligence (AI) is a truly revolutionary technology that has captured the imagination of investors like few others before. This is a double-edged sword, even if the technology is really here to stay. If we learned anything from the year 2000, it’s that too much hype around new technologies without the economics to back up the sky-high valuations is dangerous territory.
I don’t want to draw too close a parallel here (there’s every reason to believe this isn’t the second round of the dot-com bubble), but it’s always wise to maintain a healthy skepticism during a boom. All eyes, both skeptics and believers, are on NVIDIA‘s (NASDAQ: NVDA) next annual shareholders meeting.
On June 26, 2024, the figurehead of the AI revolution will hold the meeting, discuss strategy, and vote on action items such as board approvals. Annual general meetings typically don’t move the needle as much as earnings reports do, but it’s still an important event that could help shed light on what the future holds for Nvidia and the market as a whole.
So, with the meeting quickly approaching, is it a good time to jump on the Nvidia bandwagon? Here are three reasons why the stock still looks strong.
1. Nvidia has a lot of money to play with
As the company rose to stardom and demonstrated how lucrative the business is, its competition wants a piece of those profits. The threat of a amd either Intel Catching up and eating into the roughly 80% market share that Nvidia enjoys is real and should be taken seriously. However, Nvidia has significant resources to defend itself through constant innovation.
In technology, having the best product is a big help. AMD and Intel need to produce a product comparable to Nvidia’s if they hope to reduce their market share. This requires money, a lot of it. AMD spent $1.5 billion on research and development (R&D) last quarter, while Nvidia spent $2.7 billion. Remember, Nvidia is already in pole position; It has the best technology on the market and still outspends AMD almost two to one.
Intel, on the other hand, is spending more than both, with $4.4 billion last quarter. The problem here is that this spending is putting Intel in the red. How long can he continue like this?
Take a look at this chart showing the free cash flow (FCF) of these companies. FCF is a company’s income after subtracting operating expenses and capital expenses (the money a company spends to grow) and is indicative of how much room for maneuver a company has if it wants to, for example, increase spending on R&D.
2. The market as a whole is growing rapidly
So if we accept that Nvidia has the resources to defend itself against its main competitors, we can assume that Nvidia can maintain or increase its market share. There are certainly more factors, but it’s not a wild assumption.
Statista.com predicts a compound annual growth rate (CAGR) for the overall AI market of around 28.5% through 2030. This is a very fast growth rate, although slower than lightning speed at which the company has been growing recently. Still, maintaining this would be an incredible growth rate.
This is an estimate for the entire market, not just semiconductors, which are Nvidia’s daily bread, so it is a very approximate yardstick. The semiconductor segment could have a lower CAGR rate than this. However, this brings me to my next point.
3. Nvidia is not resting on its laurels: it is expanding its revenue streams
There’s no doubt that what has led to Nvidia’s massive success lately is the sale of its powerful AI-enabled chips, but the company sees a future beyond this. Nvidia is trying to build a complete artificial intelligence ecosystem. It is partnering with companies like Dell to deliver local and large-scale AI computing solutions. It is building end-to-end technologies and platforms designed for autonomous vehicles, humanoid robotics and drug research. There’s more, but I’ll stop here. The point is that Nvidia intends to position itself at the center of everything related to AI, as a star around which other companies orbit, instead of simply being another link in the chain.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long $45 January 2025 calls on Intel and short $35 August 2024 calls on Intel. The Motley Fool has a disclosure policy.
Three Reasons to Buy Nvidia Stock Before June 26 was originally published by The Motley Fool