Nvidia/AI: demand surge will power more blowout results

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Tech start-ups dream of generating the sort of gains US chipmaker Nvidia has reported this year. The hype cycle of artificial intelligence, powered by Nvidia chips, is nowhere near over. In the current quarter, Nvidia expects revenues to rise by around 170 per cent on last year. Not only is this better than peers, it exceeds average growth for start-ups too. 

Nvidia is reaping the rewards of plans put in motion decades ago. After the company listed in 1999 it pioneered the graphics processing unit (GPU), starting with the GeForce 256. GPUs were later configured so they could cope with the data needed to train large language models for generative AI.

Nvidia’s data centre unit — which includes advanced AI chips — grew 171 per cent to over $10bn in the last quarter.

Geopolitics have curtailed the potential market. Last year, the US banned exports of cutting-edge chips to China. Nvidia’s chief executive Jensen Huang has spoken about the dangers of more restrictions on a market that accounts for up to a quarter of data centre sales.

But sales of Nvidia’s H100 and A100 chips elsewhere are rising. Saudi Arabia and the United Arab Emirates are the latest buyers hoping to develop generative AI capabilities. Nvidia now says further curbs on sales to China would have no immediate material impact on financial results.

It is reasonable to ask what sort of threat is posed by the determination of Big Tech companies to develop their own AI chips. Alphabet is working on a tensor processing unit (TPU) designed for the job. It has the funds to pursue this goal. Free cash flow was seven times the size of Nvidia’s last year. But Nvidia is busy prepping a more powerful GH200 chip for 2024. 

For proof that growth can continue, look at the speed with which Nvidia is trying to ramp up production — an illustration of shortages in the market. Next year it plans to triple shipments of H100s. 

Many tech stocks are struggling to match the highs of late 2021, when interest rates were low and sales were high. Nvidia has blown way past that. Forecast-beating profits mean that it trades on a lower forward earnings multiple too.

The company remains the only chipmaker to exceed a market value of $1tn. The gap between demand for AI chips and the number Nvidia can make sets the stage for further gains. 

Lex is bullish on Nvidia. Are you? Please tell us what you think in the comments section below.