"A new computing era has begun."
That's a quote from Jensen Huang, the CEO of semiconductor giant Nvidia (NVDA 0.26%). His company has an estimated 90% market share in the data center chips designed to handle artificial intelligence (AI) workloads, an achievement that has driven its stock price to more than triple in 2023 (so far).
Nvidia just released its financial results for the fiscal 2024 second quarter (ended July 30), and it blew away all expectations -- including its own -- on the back of that dominant position in the AI chip space.
Earlier this year, the company joined tech giants Apple, Microsoft, Amazon, and Google parent Alphabet with a valuation of more than $1 trillion. While all of those companies are experimenting with AI in various capacities, none of them is as critical to the industry as Nvidia, so here's why it's my pick of the bunch.
Nvidia pioneered artificial intelligence
The artificial intelligence boom of 2023 was ignited by OpenAI's online chatbot, ChatGPT. It was the first time investors and consumers could truly interact with AI at scale, after years spent listening to predictions about its ability to reshape the future. But OpenAI could never have reached this point without Nvidia; in 2016, Huang delivered the first AI supercomputer to the start-up, and it has been using Nvidia's semiconductor hardware ever since.
In fact, Huang has been nicknamed the "Godfather of AI" for his commitment to developing the technology when most other companies treated it like a futuristic dream. In a recent keynote address, he told the audience he "bet the company" on AI five years ago in 2018, by electing to reinvent the graphics chip and the software to go with it.
Fast forward to the here and now, and Nvidia's latest A100 and H100 data center chips are the gold standard for high-performance computing. They are sought-after by every major cloud services provider from Amazon Web Services to Microsoft Azure to Oracle Cloud Infrastructure, as these platforms seek to provide AI capabilities to their business customers.
Huang believes there is $1 trillion worth of existing data center infrastructure that needs to be upgraded to support accelerated computing and AI. The only real contender capable of competing with Nvidia in this space is Advanced Micro Devices, but its latest MI300 AI data center chips won't start shipping until the end of the year. Therefore, it's likely Nvidia will continue to dominate this market for the foreseeable future.
Nvidia just delivered another blockbuster quarterly result
Three months ago, Nvidia delivered its financial results for the fiscal 2024 first quarter (ended April 30), and they shocked investors. The company issued a forecast for the second quarter suggesting it could generate $11 billion in revenue, which was $4 billion higher than Wall Street analysts had anticipated.
With the second quarter now in the books, it appears even that number was conservative, because Nvidia wound up delivering a whopping $13.5 billion in revenue. The figure marked an increase of 101% from the same quarter last year, and the majority of that growth came from the data center segment, which, of course, was driven by demand for AI chips.
Nvidia's data center segment brought in $10.3 billion in sales, up 171% year over year and far above analysts' estimates of $8 billion.
In the same quarter just two years ago, the company's data center segment generated just $2.3 billion in revenue and it was smaller than its gaming business -- that shows how rapidly the demand for AI chips is growing.
Now, Nvidia has issued another round of blockbuster guidance for the upcoming fiscal 2024 third quarter, telling investors it expects to deliver $16 billion in revenue. That's much higher than the $12.6 billion Wall Street was anticipating.
Plus, the strong Q2 top-line result led to an 843% year-over-year surge in Nvidia's net income (profit), to $6.2 billion, translating to $2.48 in earnings per share. As the company continues to scale its data center business, its gross profit margin should continue to improve, which will allow more cash to flow to its bottom line.
Why Nvidia stock is my pick of the trillion-dollar bunch
Make no mistake -- Nvidia stock is incredibly expensive by all traditional metrics. Based on the company's trailing-12-month non-GAAP (adjusted) earnings per share of $5.25, its stock trades at a price-to-earnings (P/E) ratio of 95.6. That's over 3 times more expensive than the Nasdaq-100 technology index, which features Nvidia's trillion-dollar peers, and trades at a P/E ratio of 30.1.
But the key here is Nvidia's growth. Investors will always pay a premium for a company that delivers triple-digit-percentage growth in revenue and earnings each quarter (year over year), because while its P/E ratio looks expensive today, it can appear very cheap when looking two, three, or even five years into the future.
That brings me back to AI. This technological revolution is just beginning, and as I mentioned earlier, Jensen Huang is eyeing a data center opportunity worth $1 trillion, of which Nvidia currently has a 90% share. But that's just the hardware side.
On the software side, Cathie Wood's Ark Investment Management thinks $8 in revenue will be generated for every $1 in chips Nvidia sells, which could equate to $14 trillion in total revenue across the AI software industry by 2030. Nvidia has built advanced software platforms like Omniverse, which businesses can use to build digital twins of real-life assets for infrastructure investment planning. Then there's Drive, Nvidia's fully autonomous self-driving platform it's selling to leading automotive manufacturers like Mercedes-Benz.
While most other tech giants are using AI to accelerate their own businesses, Nvidia is the key facilitator. Without this company's hardware, most AI strategies are dead in the water. Let's be realistic -- Nvidia is unlikely to maintain a 90% market share forever, but I think it will remain the leading innovator in the AI space. Even if its market share halves over the next decade, there will likely be enough value creation across the industry for the company to continue delivering generous returns to investors.
For that reason, I think Nvidia has a much longer growth runway than any of its peers in the trillion-dollar club. Its stock has the potential to supercharge any portfolio over the long term, so investors should definitely consider owning it.
