Nvidia Stock Explained

Nvidia is a US semiconductor manufacturing company. It’s famous for inventing graphics processing units (GPUs) used to enhance the rendering of digital graphics/videos, and speed up computing workloads.

Founded by Jensen Huang, Chris Malachowsky and Curtis Priem in 1993 “to solve the problem of 3D graphics for the PC”, Nvidia has since become one of the world’s most important technology companies.

Desktop computers include integrated graphics tech, but many PC gamer geeks buy a dedicated graphics card (aka GPU) to boost the performance of games. More than 75% of gamers choose Nvidia graphics cards. However, Nvidia’s financial results released in May 2023 show gaming revenues were down 38% from a year ago.

Where the company is making the biggest gains is through its data centre family of products—GPUs, software, and cloud provider partnerships designed to support emerging generative artificial intelligence (AI) applications.

The company reported $US7.19 billion in revenue for the first quarter of 2023 including record data centre revenue of $US4.28 billion. It expects to achieve revenue of $US11 billion in the current quarter.

Unless you’ve been hiding under the proverbial rock, you’ll have heard of applications like ChatGPT and Midjourney—training the AIs behind these apps requires thousands of GPUs. Some reports estimate Nvidia holds 95% of the market share for GPUs used in machine learning.

Nvidia’s new breed of GPUs and tools help companies looking to harness AI to speed up the machine learning lifecycle (ML) by handling intense computing workloads during the ‘inference’ phase when ML models are deployed and refined.

Co-founder and CEO of NVIDIA Jensen Huang said: “Arming developers with the most powerful and flexible inference computing platform will accelerate the creation of new services that will improve our lives in ways not yet imaginable.”

Nvidia Named in ‘Magnificent Seven’

Coined by the host of US news network CNBC’s Mad Money show, Jim Cramer, the magnificent seven describes the top seven US companies by market cap: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.

Just these seven stocks lifted US markets around 15% in the first half of 2023. The outsized influence of the magnificent seven has prompted Nasdaq to carry out a special rebalancing of its Nasdaq 100 index.

Many analysts believe tech stocks buoyed by investor interest in AI—including Nvidia—are overpriced and there’s bound to be some correction. At least until AI’s real-world benefits and profitability have had more time to be realised

Is ChatGPT to Blame?

As the current poster child for AI applications, it’s clear that ChatGPT has played a major role in Nvidia’s meteoric share price rise.

The company behind ChatGPT, OpenAI, worked with Microsoft to develop the supercomputing infrastructure needed to train the AI models including tens of thousands of expensive Nvidia GPUs.

A senior Microsoft executive described the scale of the infrastructure as unprecedented, with “exponentially larger clusters of networked GPUs than anyone in the industry had tried to build.”

On average, analysts predict Nvidia’s price to rise to $US482 per share over the next 12 months.

Positively, Nvidia is the market leader and supplier of choice for AI acceleration projects. Recent research suggests that continued development and commercialisation of ChatGPT will hinge on the processing power of more than 30,000 GPUs, likely to be sourced from Nvidia. Each Nvidia A100 GPU costs around $US10,000.

Plus, enabling AI is not the only string in Nvidia’s bow. The company has its hand in the industrial metaverse (through its Omniverse Cloud service for auto makers to create digital twins) and software for the design of electric and autonomous vehicles, which are projected to grow in sales.

But whether Nvidia’s current valuation is sustainable long-term will largely depend on investors’ continued faith in AI as an economic driver. Factors to consider include:

• Will AI actually boost the economy? Global investment bank Goldman Sachs’ analysis finds that AI adoption could boost the US equities market and company profits over the next ten years but warns it’s hard to predict the timing and extent of the effect, especially if a recession undercuts productivity gains. Goldman Sachs points out that current valuations of some individual stocks are reminiscent of dot.com darlings—many of which crashed in the early 2000s when that bubble burst.
• How will AI be adopted by business? In its September quarter Research Monitor, Australian financial services firm Shaw and Partners argued that while semiconductors and cloud infrastructure providers should be near-term winners, the revenue benefit for vendors creating AI apps remains murky. “Generative AI is viewed as more of an enterprise sale, so adoption is expected to be slow,” writes senior analyst, Jules Cooper. “Customers will need time to understand the technology, run their proof of concepts and overcome hurdles like data privacy and reliability.”
• How will regulation and competition impact growth? AI’s ethical grey areas and potential destructive power make it a political topic: regulatory controls could threaten Nvidia’s growth. The Biden administration has flagged plans to restrict exports of some AI chips to China, curbing a key market for Nvidia’s sales. Additionally, semiconductor competitors including AMD and Intel—as well as yet to be seen startups—could increase their market share through innovation or if Nvidia can’t keep up with demand.

To buy Nvidia stock, speak to your stockbroker/financial advisor or purchase via a share trading app. You can own a stake in Nvidia in three easy steps:

1. Decide whether you’ll buy Nvidia stock (NASDAQ: NVDA) directly or invest in an exchange traded fund (ETF) on the ASX with holdings that include US technology stocks, such as the Betashares NASDAQ 100 ETF (NDQ) or the VanEck MSCI International Quality ETF (QUAL).

2. To use a share trading app to directly buy Nvidia shares, look for a platform that features:

• Access to US stock exchanges;
• Minimum investment or trade amounts that meet your needs; and
• Low brokerage fees and foreign exchange fees.

3. Once you’ve created an account with the app, simply add funds, search for the ticker symbol of Nvidia, then buy at current market rates or use a limit order to buy when the share price matches your desired value.

Note that in addition to declaring your foreign income to the ATO, non-US residents pay a withholding tax on dividends earned from US stocks which can potentially be offset, so you may want to speak with an accountant at tax time.

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