Nvidia (NASDAQ:NVDA) investors had a good week this week, as shares soared more than 12%. This was mostly in response to news of new AI-powered product announcements, including “Deep Learning Super Sampling (DLSS) technology” that will support “an assortment of blockbuster games and franchises,” and help their graphics flow “smooth as silk.” But the good news for shareholders probably won’t end there.
Nvidia investors got even more good news in the form of a late-breaking upgrade from Morgan Stanley analyst Joseph Moore. Calling generational AI (hint: think ChatGPT) a “megatrend,” and Nvidia one of the major beneficiaries of this new artificial intelligence technology, Moore concluded today that no matter what short-term difficulties Nvidia may be working through in both its gaming and data center sales, the long-term opportunity here is too great to be ignored.
The advent of ChatGPT and similar technologies, which are used to generate almost confoundingly-human like text responses to inquiries, as well as original digital artwork, and which are growing in capability right before our eyes, is quite simply “one of the most significant developments in technology since the development of mobile internet,” declares Moore. And for the next three to fives years, minimum, tech companies are likely to engage in an arms race for supremacy in generational AI.
What does this mean for Nvidia? The answer goes way beyond Nvidia simply using its tech to make videogames run better. Nvidia’s customers are going to have to buy enormous quantities of fast computer chips in order to meet the “high capital intensity of [AI] workloads, particularly on the training side” as they generate their own versions of ChatGPT.
Moore sees this generating as much as “3-5x growth” in monies spent on chips to train AI models over the next five years, “even with a relatively fixed number of model developers.” (I.e. If the AI gold rush expands to bring new players into the market, growth could be even greater). Even taking a conservative view of things, Moore sees the potential for Nvidia generating sales growth in the 24% annual range over the next decade.
And yet, good as that sounds, it does raise at least a yellow flag on Nvidia in terms of valuation.
Consider that “24% growth” implies that a 24 P/E would be an appropriate fair value to pay for Nvidia stock. But after gaining 70% already this year, Nvidia stock doesn’t…
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