On Monday the share price was Nvidia (NASDAQ: NVDA) will drop about 90%. But don’t worry, Nvidia holders: You’ll also have ten times as many shares when the company implements the 10-for-1 stock split it announced during its May 22 earnings call.
Stock splits don’t change a company’s underlying valuation, but some think they are reasons to buy shares. Why? Because a lower stock price could attract more retail investors who may not have the $1,200 needed to buy a share of Nvidia today.
But now that most brokerages are offering fractional share buying, splits may no longer have the impact they once had in driving purchases by retail investors.
One should never buy a stock based on what they think others will do in the short term in terms of buying or selling. Instead, one should focus on long-term fundamentals. And for Nvidia, these will be guided by these three extremely important factors.
How wide is a canal CUDA?
Nvidia is in such a strong position today because it has been so forward-thinking. The company started developing its CUDA software stack way back in 2006. CUDA allows developers to program graphics processing units (GPUs) for parallel data processing, which is why developers have the ability to train artificial intelligence (AI) models on the tens of billions or even hundreds of billions of parameters today.
Developers have become accustomed not only to Nvidia’s chips, but also to CUDA, and are likely reluctant to learn an entirely new platform to program other accelerators. That’s especially true as companies are currently racing to train and deploy models as quickly as possible. Nvidia has a so-called network effect with CUDA: the more it has become a standard for developers, the harder it is for competitors to break in.
However, investors will need to keep an eye out for competing offerings. Companies pay a fortune for Nvidia GPUs and definitely want an attractive alternative.
Advanced micro devices (NASDAQ: AMD) is innovating its open-source RocM software platform, which it claims can port CUDA code to AMD’s MI300 line of GPUs. And Intel (NASDAQ: INTC) is making perhaps its biggest move by bringing in other tech giants into something called the UXL Foundation.
UXL is committed to developing a purely open-source software platform that can program any type of hardware accelerator, based on the Intel OneAPI platform. With serious support from Intel and other tech giants, it’s a threat to be taken seriously.
CUDA is a key to Nvidia’s moat. Investors should keep an eye on the development of alternatives and see if they make any breakthroughs within the developer community.
An unprecedented pace of innovation
Nvidia, perhaps sensing that its software moat might be under attack, made a big announcement last fall that the company would double its pace of innovation. In the future, Nvidia will move from introducing a new chip architecture once every two years to once a year. On that note, the company recently introduced its new chip architecture for next year, codenamed Blackwell.
Blackwell will deliver 2.5 to 5 times better performance than the previous Hopper architecture, depending on the use case. When Blackwell is packaged in a new 72-Superchip cluster with Nvidia’s updated networking technology, that cluster can achieve an astonishing 30x better performance than a similarly sized Hopper cluster.
Blackwell was just announced in March, but at the recent Computex 2024 conference in Taiwan, Nvidia CEO Jensen Huang decided to announce the next architecture after Blackwell, codenamed Rubin. The company hasn’t announced any performance specs around Rubin, but we can be sure it will offer an even bigger performance jump over Blackwell.
Now Nvidia is raking in the cash, giving it a huge amount of resources to invest in future innovation versus AMD, Intel, cloud giants’ internal accelerators and other venture capital-backed competitors. But just like with software, competitors are not standing still.
AMD also announced at Computex that it would now move to an annual architecture cadence. And Intel is investing heavily in progressing “five new nodes in four years” as it aims to surpass Nvidia’s factory partner Taiwanese semiconductor manufacturing (NYSE: TSM) in transistor leadership. If Intel meets its roadmap and surpasses TSMC in terms of raw production capacity, that would be an interesting competitive field.
Both competitors are clearly in catch-up mode and both currently have a minuscule share of the AI chip market. But these efforts are something to watch out for even if Nvidia continues with Blackwell and Rubin.
How big is the AI chip market?
Finally, another reason to buy Nvidia is the size of the future AI chip market itself. Of course, the ultimate size of the market is currently a subject of discussion.
Some technology specialists believe that the current AI market is overhyped and may disappear if the current boom produces disappointing results. Look no further than an article in last weekend’s newspaper Wall Street Journal in which a very opinionated article proclaimed that the AI revolution was “losing momentum” in terms of end-user benefits.
Others disagree. Interestingly, some of the biggest beneficiaries of AI today are not consumers, but the tech companies themselves who use AI to write code that takes many man-hours, or even help design semiconductors themselves. According to Deloitte, the AI chip market could fall between the conservative $110 billion and the more aggressive $400 billion that AMD CEO Lisa Su recently put forward by 2027.
Nvidia just posted $22.6 billion in data center revenue last quarter. Of that, $19.4 billion was computer chips, while the remaining $3.2 billion was network revenue. The results of the past quarter already put Nvidia at a run rate of $80 billion. If the growth of the AI chip market slows to just $110 billion by 2027, that would be very bad for Nvidia given its current valuation.
However, a $400 billion AI chip market would be more like it, and the most likely outcome. TSMC recently predicted on its latest earnings call that the AI chip market would grow at a 50% annual rate through 2027. If we conservatively assume an $80 billion market this year, that would translate into a $270 billion market by 2027.
It goes without saying that the ultimate end market size is important for any stock trading at a price-to-earnings ratio of 71, as Nvidia did after Thursday’s close. Investors should pay attention to new AI chip forecasts, as well as end-customer use cases, as they continue to be refined by leading industry participants.
Don’t pay attention to a stock split
While a stock split could make big headlines, more important to Nvidia’s story is the strength of its software moat, its pace of innovation relative to its competitors, and the overall market size for AI chips, which will depend on AI’s usefulness. Those are the factors investors should focus on in the coming week.
Should You Invest $1,000 in Nvidia Now?
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Billy Duberstein and/or his clients have positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has a disclosure policy.
Nvidia’s 10-for-1 Split Isn’t a Reason to Buy the Stock, But These 3 Reasons were originally published by The Motley Fool
