Artificial Intelligence (AI) has the power to transform society and revolutionize the economy, at least according to its evangelists. Whether it lives up to its full potential remains to be seen, but the impact of the technology is already being felt, with companies like PwC – one of the ‘big four’ accountants – claiming that the technology will add $15.7 trillion to the global economy could add economy by 2030, its revolutionary power appears to be more than just hype.
Shares of Nvidia (NASDAQ: NVDA)the de facto leader of AI, is trading at record highs again. And for good reason: the company’s chips are the linchpin of the industry. Without them, the data-hungry AI models would not be able to function, or at least their power would be greatly diminished. So far, no one has been able to match Nvidia’s chips in power or efficiency, and it may take a while before they do.
Nvidia’s latest line of chips, Grace Blackwell, will be rolling out soon. Nvidia’s own CEO, Jensen Huang, described demand for the chips as “insane,” while the CEO of Foxconn, one of the world’s top semiconductor manufacturing partners, called it “crazy.” With rollout imminent, is now the time to buy?
Nvidia has had some bumps in the road, but things seem to be back on track
In an effort to maintain the near stranglehold that Nvidia has on the AI chip market, the company has committed itself to an annual update rate for its chip architecture, an incredibly ambitious pace goal. Each iteration is much more powerful than the last. The company claims the new Blackwell will be at least 400% as powerful as Hopper. This pace, if the company can maintain it, will act as a kind of innovation moat: a defense that competitors love AMD will struggle to overcome this as they are playing catch-up with only about half of Nvidia’s research and development budget.
However, it’s a tall order and Nvidia has already made a mistake. Blackwell was originally going to be released by now, but a problem was discovered in the production process and Nvidia announced that the release would be postponed. Fortunately, the mistake was related to the manufacturing process and not the chips themselves or their operation, but things still didn’t look good for the company.
However, fears of a major downside were quashed quite quickly: Blackwell will be rolling out soon. The delay will only be about six weeks, and any short-term loss will be more than offset by the still strong demand for Hopper chips. It should give you pause, though. Is this update frequency really sustainable in the long term? It is important to maintain a healthy skepticism. That said, Nvidia has handled the situation well and the company appears to be moving full steam ahead.
Blackwell is becoming big business, but keep an eye on its valuation
Nvidia is partnering with Foxconn to build a new manufacturing facility in Mexico solely for the production of Blackwell chips. Once completed it will be the largest in the world. It’s a very smart move as it diversifies Nvidia’s manufacturing away from Taiwan and the region’s geopolitical concerns. And of course it will greatly increase the production capacity for the chips.
That’s great news, because according to management, Nvidia has been sold out of Blackwell for an entire year. Production cannot keep up with the incredible demand for the new chip. That’s certainly a good position to be in.
Given the advanced sales, investors appear to have found renewed confidence in the company and the shares are trading as high as before. I think it could still get a boost once Blackwell deliveries actually happen. However, proceed with caution. If you are retirement planning or otherwise have a shorter investment horizon, I recommend holding off for now. Although Nvidia seems to be doing everything right, the valuation with a forward is still quite high price-earnings ratio (P/E) of 46. That’s high even for technology, as you can see below.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, and Nvidia. The Motley Fool has a disclosure policy.
Demand for This Spectacular New AI Chip Is “Crazy” Should You Buy Nvidia Stock Now Before It Launches? was originally published by The Motley Fool
