Nvidia has been strutting around like the big man on campus since generative artificial intelligence took the tech world by storm. But is there a banana peel on the path ahead that could trip up the AI chip powerhouse and derail Nvidia stock's impressive run?
Possibly. Nvidia's mighty processors now run most data centers powering the generative AI revolution. But challenges lie ahead, from longtime semiconductor competitors AMD and Intel to growing questions and concerns about a fast-expanding, but controversial, market that's still in its infancy.
The uncertainty surrounding Nvidia's AI future was underlined last week when Nvidia stock retreated despite a stellar earnings report that blew past expectations. The reason: Nvidia's sales guidance missed lofty "whisper" numbers, or unofficial estimates circulating on Wall Street. The stakes will rise in the next two weeks when Nvidia's top rivals, Advanced Micro Devices and Intel, unveil new AI products and initiatives.
"Nvidia has done a tremendous job building up a position in the AI market," Rodrigo Liang, chief executive of AI startup SambaNova Systems, told Investor's Business Daily. But "it's going to be a very big market that allows different players to compete. We're in the early innings of the AI market."
How Nvidia Stock Rode The Artificial Intelligence Frenzy
Nvidia was already the dominant graphics chipmaker when new AI technologies began to emerge over the past decade.
New AI tools required more heavy-duty computing than conventional processors could handle. This created an opening for Nvidia. The Santa Clara, Calif.-based company's processors — until then used mainly for gaming and high-end graphics for creating blockbuster movies — turned out to be suitable for the processing firepower needed to run AI-focused data centers.
The frenzy over generative AI triggered by the introduction of ChatGPT a year ago boosted Nvidia's market position even further.
But that also led to worries about Nvidia's grip on the market.
Concerned about relying on a single supplier, cloud service providers and other large enterprises began looking for alternatives. They range from internally developed chips to processors from AMD, Intel and several startups.
Plus, with Nvidia the go-to AI chip supplier now, the company can charge hefty premiums for its processors and related hardware. That has led customers to look for more affordable options, Patrick Moorhead, an analyst with Moor Insights & Strategy, told IBD.
"Nobody likes to be captive to one vendor," Moorhead said.
Cem Dilmegani, an analyst at research firm AIMultiple, agrees, suggesting Nvidia's dominant market position could backfire.
"Anyone who is spending in the gen-AI world now is lining Nvidia's pockets," Dilmegani told IBD. "No one is happy about that, except Nvidia of course."
AMD, Intel Strike Back
And Nvidia's rivals are striking back.
On Dec. 6, AMD will officially launch its Instinct MI300 family of data center graphics processing unit, or GPU, accelerators. At the event, called "Advancing AI," AMD says it will discuss its growing momentum with AI hardware and software partners.
A week later, on Dec. 14, Intel will hold an event called "AI Everywhere," which will include the launch of 5th Gen Intel Xeon processors for data centers and Intel Core Ultra processors for laptops.
Moorhead says AMD will be the first company to truly challenge Nvidia in the AI chip market. "In the first quarter next year, they will have the only GPU-based accelerator for large language models that competes directly with Nvidia," Moorhead said. Intel could follow with a similar product later in 2024, he says.
Meanwhile, Nvidia isn't standing still.
On Nov. 13, Nvidia introduced its H200 computing platform designed for training and deploying the kinds of artificial intelligence models powering the generative AI boom. The H200 is the first GPU to use an advanced memory technology called HBM3e. The news drove Nvidia stock higher.
"Nvidia is working like heck to make sure that somebody doesn't come along that's able to replace them," Moorhead said. "Nvidia is banking on creating the next new thing that you have to have."
He says the company is clearly pushing to create a "sticky" ecosystem of products that provides a full stack of technology, including processors, servers, networking, software and services.
Other Semiconductor Stocks Play Catch-Up
Nvidia's early lead has certainly helped the company set the pace in the market.
When OpenAI fired the starting gun for the generative AI era with the launch of ChatGPT in November 2022, most tech companies weren't focused on the topic, AIMultiple's Dilmegani says.
Nvidia "benefited from not enough interest going into this topic (before ChatGPT)," Dilmegani said. "Now every big name in tech either has their own (AI) chip or is going to be launching one. And that includes the largest Chinese Big Tech firms."
Cloud service providers Amazon Web Services, Microsoft Azure and Alphabet's Google Cloud have developed their own AI processors that, for now, are working alongside Nvidia chips.
Plus, startup firms are nipping around the edges of the market. They include Cerebras Systems, Groq and SambaNova Systems.
Artificial Intelligence In The Enterprise
AI startup SambaNova highlights a key arena in the battle over AI: data centers and enterprise networks.
The company, whose customers include U.S. government national laboratories like Argonne and Lawrence Livermore as well as foreign public-sector enterprises, offers computer systems for enterprises to run AI programs in private and secure environments.
Deploying AI in corporate networks was a big trend before the AI craze triggered by ChatGPT. Liang, SambaNova's CEO, believes the focus will soon shift back to AI in the enterprise.
"In 2023, we saw the consumer world really start embracing gen-AI with ChatGPT," he said. "But 2024 will be all about the enterprise. Companies are starting to invest, go into production and actually do massive transitions to make their companies AI-enabled."
"Enterprise-level AI has a different set of concerns than consumer-grade AI," Liang added. "And those are data privacy and data security, and your accuracy for business decisions needs to be significantly higher."
Nvidia Stock Near All-Time High
The spike in demand for chips for artificial intelligence infrastructure drove Nvidia stock to a record high recently.
In the company's fiscal third quarter ended Oct. 29, Nvidia's data center sales jumped 279% from the year-earlier period to a record $14.51 billion. Its data center business accounted for 80% of its total revenue.
On the recent analyst call, Chief Executive Jensen Huang said Nvidia's data center business can grow through 2025 at least.
Global cloud service providers and consumer internet companies are driving the first wave of AI data center growth, Huang says The next waves will include national governments, regional cloud service providers and enterprise software firms, he said.
Buildout Risks For AI Stocks
Nvidia has been a clear leader among AI stocks and semiconductor stocks. Technical analysis showed the stock in a buy range through Nov. 29. On Thursday, Nov. 30, shares dropped back below a double-bottom base buy point of 476.09, also cutting below its 21-day exponential moving average, according to IBD MarketSmith charts.
Nvidia stock ended the regular session Nov. 29 at 481.40, before giving up ground during Thursday's session. The company's shares notched an all-time high of 505.48 on Nov. 20.
But the massive artificial intelligence buildout poses a risk to Nvidia. Bernstein Research analysts cited the danger "from an overbuild situation" given that "capacity is being built in front of expected demand."
"While gauging the magnitude and trajectory of capacity additions and AI demand is difficult, we believe that Nvidia and other AI infrastructure hardware vendors offer the most near-term upside potential, but carry the most risk from an overbuild situation," Bernstein analysts led by Toni Sacconaghi and Stacy Rasgon told clients in a note.
AI Stocks To Buy And Watch In November 2023
Goldman Sachs analyst Toshiya Hari argues that while the near-term outlook for data center sales looks strong, there is reason to be cautious.
"As we have witnessed in the past, we are cognizant of the cyclicality/lumpiness inherent to capital spending patterns at the cloud service providers," he told clients in a note. Hari said he "would begin to question sustainability should Nvidia's customers fail to monetize ongoing investments in Gen AI." Hari rates Nvidia stock as a buy with a price target of 625.
Deutsche Bank analyst Ross Seymore noted that the data center market experienced significant "inventory digestion periods" in the first half of 2019 and second half of 2022 that crimped semiconductor and server hardware sales. Seymore rates Nvidia stock as a hold with a price target of 560.
China Market For Artificial Intelligence Chips Closed Off
Nvidia's latest earnings report pointed to another risk: China.
Nvidia crushed Wall Street's Q3 estimates and guided higher than views for the current quarter. But Nvidia stock fell on concerns about the impact of U.S. trade restrictions on China covering advanced semiconductor technologies.
China typically has accounted for 20% to 25% of Nvidia's data center sales.
On a conference call with analysts, Nvidia Chief Financial Officer Colette Kress said the export controls will have a "substantial" negative impact on the company's sales in China in its fiscal fourth quarter. However, Nvidia expects to offset that lost business with growth in other regions, she says.
Meanwhile, the company plans to introduce new regulation-compliant computing products for the China market in the next couple months.
Bullish Views On Nvidia Stock
Nvidia stock has scored massive gains in the years since it traded at a split-adjusted low of 4.77 in July 2015. Still, with the growth of artificial intelligence and other trends, other Wall Street analysts remain bullish on Nvidia's prospects both near term and longer.
"The industry is in the early innings of two transformational paradigm shifts toward ubiquitous acceleration and generative AI, with Nvidia's wide moat potentially expanding," TD Cowen analyst Matthew Ramsay said in a client note. He rates Nvidia stock as outperform with a price target of 700.
In its fiscal third quarter, Nvidia's earnings rocketed 593% year over year to an adjusted $4.02 a share. Sales soared 206% to $18.12 billion.
For the current quarter, Nvidia forecast sales of $20 billion, up 231% from the prior year. That would be the company's third straight quarter of triple-digit percentage growth in sales.
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