There is no denying that Nvidia (NASDAQ: NVDA) has been on fire since early last year. Shares are up more than 750% at the time of writing, driven by the potential implications of generative artificial intelligence (AI). The ability to streamline time-consuming tasks and automate routine processes promises to boost productivity and could unleash a wave of greater profits for companies that embrace this advanced technology.
Nvidia’s graphics processing units (GPUs) are the gold standard, delivering the computing power needed for AI processing. This has led to a surge in demand for the company’s high-end processors, causing its operating and financial results to skyrocket, resulting in its recent 10-for-1 stock split.
While some investors fear the easy money has already been made, others believe the best is yet to come. One analyst suggests Nvidia has a killer advantage that will help it stay ahead of the competition and unleash a “cash gusher” that will benefit shareholders.
Let’s see if the analyst’s argument holds up and what it means for investors.
A long track record of success
To understand the source of this “money flow,” it helps to take a look back at how Nvidia got to where it is today.
Nvidia’s cutting-edge processors have long been the industry standard for serious gamers. The company controlled 88% of the discrete desktop GPU market in the first quarter, according to data compiled by Jon Peddie Research.
Nvidia, however, adapted that same technology to zip data through the ether, becoming the go-to processor for data centers. The company is estimated to control a whopping 92% of the data center GPU market, according to IoT Analytics. Nvidia is also the undisputed leader in machine learning processing — an established branch of AI — with an estimated 95% of the market. That market, according to data from New Street Research.
With so much of the generative AI processing happening in the cloud and data centers, Nvidia has cemented its position as a leader. The company will release its Blackwell family of processors later this year, and CEO Jensen Huang has said, “The Blackwell Architecture platform will likely be the most successful product in our history.” If that’s the case, and I believe it is, the best may yet come.
Moreover, despite years of opportunities, no serious competitor has emerged yet, while the popular story says that competition for Nvidia is coming.
A “money lender”
Melius Research analyst Ben Reitzes believes Nvidia has a huge advantage that some investors may be overlooking, one that will keep the company at the forefront of the technology. Nvidia not only provides the chips that are tailor-made for AI, but also the integrated software that squeezes every last bit of performance out of these AI-centric processors. This “full stack” approach, or the merging of hardware and software, gives Nvidia a significant advantage that will be difficult for rivals to match, especially given the company’s long track record as a leader in the space.
“What they did was build a computer language and an ecosystem that allows you to monetize AI, and it’s clear they’re very good at it,” Reitzes said.
The analyst further notes that Nvidia’s research and development (R&D) cadence makes it difficult for competitors to keep up. The company recently increased its already relentless pace of innovation, with CEO Jensen Huang saying that the company is now on “a one-year rhythm,” releasing new processors every year instead of every two years. “They’re running 150 miles an hour when everyone else is running 100 miles an hour. It’s going to be tough to catch these guys,” Reitzes said.
As a result of accelerating AI adoption and Nvidia’s dominant position, the company is estimated to generate $270 billion in cash over the next three years. This could provide shareholders with a hefty return in the form of share buybacks and higher dividend payments.
The analyst notes that even with higher R&D spending, the influx of cash will far exceed potential applications, with most of it returned to shareholders.
Investors are already seeing evidence of that shift. Late last year, Nvidia announced a new $25 billion share buyback plan. What’s more, in conjunction with the stock split announcement in May, the company also raised its dividend payout by 150%. That said, Nvidia currently uses less than 1% of earnings to fund the dividend, and even at the higher rate, the yield is a paltry 0.03%.
This illustrates that there is still ample opportunity for Nvidia to return money to shareholders, and with the ongoing tsunami of AI adoption, the company will have increasing resources to do so. Furthermore, given its overwhelming advantage, it’s unlikely that a rival will take Nvidia’s crown, at least not anytime soon.
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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Nvidia’s 1 Killer Advantage Will Create a “Cash Gusher” for Shareholders Following 10-for-1 Stock Split, a Wall Street Analyst Says was originally published by The Motley Fool
