There are many great companies that could benefit from the surge in artificial intelligence (AI) in the coming years, so how should investors play it? In this Fool Live video clip, recorded on Sept. 23, Fool.com contributor Rachel Warren discusses why Nvidia (NASDAQ:NVDA) is her top AI stock to buy now.
Rachel Warren: Today, I’m going to be talking about Nvidia, which is ticker symbol NVDA. I think it’s a really interesting company to consider if you’re looking for a high-growth tech company that’s very much intertwined with AI, but that’s also really established in the space that it’s in and has a really diversified business structure.
For anyone who is newer to the stock, Nvidia was founded in 1993. Definitely not a new kid on the block, it’s been around for a while. It is the No. 1 company in the world making graphics processing units or GPUs for short. The original goal of GPUs initially was to enable more-efficient processing of images on a device like a video game console. Nvidia was originally known for its GPUs in the context of the gaming industry. Then as the technology has really developed and expanded over the years, you see GPUs being essentially used as the backbone of artificial intelligence programs. Graphics processing units are designed to operate all of these different functionalities and handle basically a lot of data at the same time, which makes them really invaluable in the world of machine learning, deep learning, and AI.
Today, most AI programs use GPUs, and many of them nowadays are running on Nvidia’s GPUs. Just to give an idea of the market power that Nvidia currently has: As of the first quarter of this year, the company held an 80% share of the entire global graphics processing unit market. It has really grown its market share in recent years, even though it’s been a dominant force in this industry for so long. To give you an idea of how much that’s grown, at the end of 2016, its market share was hovering around 71%. Essentially, it increased its market share by about 9% in about five years, which is excellent.
Then the global GPU market was worth nearly $20 billion as of 2019, and it’s supposed to hit a valuation of more than $200 billion as soon as 2027. The fact that Nvidia holds such a tremendous market share is great news in terms of projecting potential future growth numbers. Nvidia has all these different tiers and types of graphic cards that are designed to support a wide range of AI needs, other needs, but for the purpose of this conversation, we’ll focus more on its AI chips.
It has basically become the top AI chipmaker today. Its chips are used in all kinds of different settings. You have cloud service providers that are using its AI chips. They are being used by Nvidia’s clients to improve things like factory logistics, they are being used in self-driving cars, they are being used by healthcare and life sciences companies for things like drug discovery and medical imaging. A huge area where Nvidia’s seeing growth quarter after quarter is by use of its AI chips in data centers, which essentially keep our world running today.
Another thing to note about Nvidia is that its dominance of the GPU market extends to both the private and the public sector. For example, at the end of August, the company announced that a supercomputer, which is going to be housed at a research center under the purview of the U.S. Department of Energy, is actually going to run on its AI chips. It’s a huge win for the company and also just goes to show how diverse its clientele is, which is an interesting thing to look at as an investor who’s in it for the long haul.
The big question that comes up is: Has this translated to financial growth for Nvidia? Definitely. If you look at its results from just in 2020, which it counted as its fiscal 2021, full-year revenue was up 53% compared to the prior year. On top of that, the company was also very profitable. Its net income was up 55%. Again, you see these data center revenues driving a huge amount of its growth. Data center revenues alone in 2020 were up 124%. Then jumping forward to the most recent quarter, the company reported 68% revenue growth year over year. Its net income grew by a triple-digit percentage, and then revenue was up year over year across all its business segments, including data center.
I think this is a really interesting stock. I am an investor that characterizes myself as having a medium risk tolerance. I don’t currently own shares of Nvidia, but it is one I’m considering for one of my future buys. One of the things I really like most about it is the fact that it is an established player in a very lucrative industry, which it essentially dominates, and the industry is growing upon high demand and so is Nvidia. If you’re looking for a tech company that’s on the cutting edge of this fast growth AI market but doesn’t perhaps have the growing pains of a newer company, maybe if you’re more on the conservative investor end of the spectrum in terms of your risk tolerance, Nvidia could be a good choice for you.
It’s a massive company. Last I checked, market cap was somewhere around $543 billion. Shares are up 70%. Last I checked from the beginning of the year, over the trailing five years, the stock gained more than 1,200%, and to give a context of what a big jump that is, the S&P 500 has gained about 100% during that period. The takeaway here is you’re looking at a massive high-growth market that’s taking off, and it has tremendous growth potential. Nvidia is not only the leader in this AI chips sphere, but it also maintains the biggest market share of all other GPU makers in general. It gives it a massive advantage, it has strong financials, high demand for its services, and shares continue to grow year after year on a really market-beating scale. In my view, this is a great stock to buy.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.