Over the last 30 years, no next-big-thing trend has changed the corporate landscape more than the advent of the internet. However, the arrival of the artificial intelligence (AI) revolution may give history a run for its money.
In its simplest form, AI utilizes software and systems to oversee tasks that would normally be delegated to humans. The incorporation of machine learning, which allows software and systems to “learn” over time and become more proficient at their tasks, is what ultimately gives AI utility in practically every sector and industry.
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Nvidia’s stock has soared thanks to the AI revolution
No company has more directly benefited from the rise of AI than semiconductor stock Nvidia (NASDAQ: NVDA). In the span of a little over one year, it’s become the foundational-infrastructure play in high-compute data centers. According to analysts at Citigroup, Nvidia’s A100 and H100 graphics processing units (GPUs) could account for a greater-than 90% share of GPUs deployed in AI-accelerated data centers this year.
Keep in mind that Nvidia is still in the process of ramping its production. Chip fabrication giant Taiwan Semiconductor Manufacturing is rapidly increasing its chip-on-wafer-on-substrate capacity, which should help ease supply chain issues for Nvidia and allow the company to meet more of its customers’ orders.
But when things seem too good to be true on Wall Street, they usually are.
In addition to contending with growing external competition from the likes of Advanced Micro Devices and Intel, Nvidia’s four largest customers, which account for 40% of its sales, are developing AI-GPUs of their own to either complement or replace Nvidia’s data-center infrastructure. Even if Nvidia is able to maintain some degree of advantage(s) over these in-house GPUs from its top customers, future orders from these four businesses are liable to taper.
Furthermore, Nvidia finds itself at risk of cannibalizing its own gross margin as it expands production. The reason data-center sales more than tripled in fiscal 2024 (ended Jan. 28, 2024) is…
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