Competition for the title of most valuable company in the world is increasing. Earlier this week Nvidia (NASDAQ: NVDA)after its monstrous run in recent years, it made a splash Microsoft And Apple become the largest company in the world by market capitalization (market capitalization), the total value of all publicly traded shares of a company.
After surpassing its rivals, Nvidia slipped back to third place, but this is not a cause for concern. It’s an exciting race and the three will probably trade places for a while. The next earnings round later this summer will be a major catalyst that could move the needle to a more stable position if either company exceeds – or falls short of – their own and Wall Street’s expectations.
No investment topic is currently more popular than artificial intelligence (AI), and Nvidia is its poster child. Investors are salivating at the incredible returns the company is consistently delivering quarter after quarter (revenue rose 260% year-over-year last quarter) with the promise of continued growth in the future. The rapid rise since AI captured the public’s attention is one for the record books. But what should investors pay attention to in the long term?
Understand what makes Nvidia special
Nvidia has a unique position on the market. The company was so ahead that it was able to capture approximately 80% of the AI chip business.
Of course, like most wildly successful businesses, it was a matter of a little luck and a lot of foresight. CEO Jensen Huang made a bet. Nvidia made chips called graphics processing units (GPUs), which for much of the company’s history were accessories to the all-powerful central processing unit (CPU) that powered it Intel what it was. He saw that the industry was reaching the limits of scaling CPU technology and that his company’s GPUs could step into the spotlight.
It turned out he was right. Without going into too much technical detail, if you shift the focus to chips that are very similar to GPUs – like the company’s Grace Blackwell “Superchip” – with CPUs playing a supporting role, you can run power-hungry applications and continue running scale them up. And AI is undoubtedly power hungry.
Nvidia doubled down on this technology before it was fashionable, so when AI exploded onto the scene, the company was already there, supplying the entire industry with its technology. Now AI servers are managed by, among others Alphabet, Amazonand Microsoft are powered by Nvidia chips.
Whether AI expands – and when – is critical
Nvidia went from a relatively niche computer company, primarily serving the video game industry, to one of the largest companies in the world. Just look at this reversal of fortune for once-dominant CPU maker Intel. The chart shows revenue for both companies over the past ten years on a rolling twelve-month basis (TTM).
That’s a twist of fate. But fate can be fickle. Nvidia’s future largely depends on whether AI delivers on its promise. Much has been made of its revolutionary power, but there is still much to prove. It wouldn’t be the first time that a technology has failed to live up to the hype surrounding it. Still, I think there’s more reason to believe AI isn’t a fluke than some of the hype cycles of the past, so then it’s a matter of when it might deliver.
If the AI value chain is a river, Nvidia is somewhere in the middle, upstream of the companies actually delivering AI products to the end market. If those companies have overpromised the value of their products or cannot deliver on time, the river downstream is dammed, potentially leading to a glut of unwanted chips. If Nvidia wants to continue the incredible growth it has experienced, enough to justify the premium value investors have placed on it, end-user demand must keep the river flowing freely.
Keep an eye on how well end-user AI applications are doing. Try something out. Do you see the value? The more useful these tools are, the higher the river’s watermark and the greater the chance that Nvidia will live up to its sky-high expectations.
Should You Invest $1,000 in Nvidia Now?
Consider the following before buying shares in Nvidia:
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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. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 calls of $45 on Intel, long January 2026 calls of $395 on Microsoft, short August 2024 calls of $35 on Intel, and short calls in January 2026 from $405 on Microsoft. The Motley Fool has a disclosure policy.
Nvidia is no longer the most valuable company in the world. Here’s what investors need to know. was originally published by The Motley Fool
