Companies that are racing to lead the artificial intelligence (AI) revolution are rapidly developing models and platforms. And for this, they're turning to Nvidia (NASDAQ: NVDA).
The tech giant makes the top-performing chip to train AI models and power AI systems, and this has helped earnings and the company's share price skyrocket. In the most recent quarter, Nvidia's revenue jumped 206%, and net income soared more than 1,200%, both reaching into the billions of dollars.
Nvidia's share price has reflected these gains by advancing more than 200% over the past year. At the same time, even after this excellent performance, the shares trade for only 34x forward earnings estimates. This looks very reasonable for a company analysts expect to achieve triple-digit annual growth over the coming five years.
However, there are a few other things to consider before buying this top stock. Let's check them out.
1. The U.S. ban on chip exports to China could hurt
Nvidia sells its chips and AI services to customers around the world through its data center unit, which has been making up the lion's share of the company's total revenue. China has generally accounted for 20% to 25% of data center revenue in recent quarters, but things may be about to change.
The U.S. has banned the sale of high-performance AI chips to China and other restricted countries for security concerns, saying the chips eventually could be used to create "advanced military systems," such as weapons of mass destruction. Following this, Nvidia developed a new category of chips for China to meet U.S. guidelines, but they, too, were banned for export.
Nvidia has plans to launch a new chip for China in the second quarter of this year, according to press reports. But these reports also suggest China's top cloud companies aren't overly interested in a slower chip — and instead may turn to local providers.
The company said in the most recent earnings call that in the next reporting period — the fiscal 2024 fourth quarter — it expects sales to decline "significantly" in China and other countries impacted by the ban. However, growth in other geographies should compensate.
If other geographies make up for the lost sales to China, that's great — but Nvidia still is losing out on a good deal of revenue due to the ban. It's still not clear whether its offering of slower chips will meet with approval from the U.S. for export, as well as the approval of Chinese buyers. This represents a headwind for the company.
2. Rivals are gaining ground — but Nvidia has the ticket to staying ahead
Today, Nvidia holds an enormous share of the AI chip market, at more than 80% — and for good reason. The company's chips are the fastest in the industry, powering the most essential tasks in AI — the "deep learning" of AI models. The company's chips help these models process enormous quantities of information so they can go on to deliver show-stopping responses to complex questions.
But Nvidia isn't alone in the market. The company faces competition from other chip designers, like Advanced Micro Devices, and competition from its own partners, such as Amazon's Amazon Web Services (AWS). You'll find Nvidia's AI platforms offered through AWS — but the latter also has developed its own chips for the training of AI models and is selling them to customers, too. As for AMD, it recently launched a new AI chip series, but Nvidia says its flagship chip still remains twice as fast.
So, rivals may be taking some market share, but Nvidia still wins when it comes to performance, and that's ensuring its leadership. Why am I confident about this?
Because Nvidia's earnings strength allows it to pour investment into research and development (R&D) and stay ahead of the pack. In the most recent quarter, Nvidia increased R&D spending by 18% to $2.2 billion, and this is likely to continue.
3. AI growth is just getting started
The surge in spending on AI chips and other related services isn't a one-shot deal. The AI story is in its very early stages, so these huge investments in the technology are just getting started. The global AI market is expected to reach $1.3 trillion in 2030 at a compound annual growth rate of more than 36%, according to Markets and Markets.
This technology could be used to revolutionize operations across industries. For example, drugmakers are using AI systems to speed up drug discovery, while automakers are using the platform in a variety of areas, from autonomous driving to the creation of AI-enabled digital factories. BMW has partnered with Nvidia for the development of a digital twin of its factory, and biotech Amgen is using the company's platform to build AI models for data analysis.
Nvidia offers not only chips but entire platforms for these and other industries, so companies can easily leverage the technology for their own uses.
What does this mean for investors? Nvidia faces some headwinds, such as the ban on chip exports to China and, to a lesser degree, the competition I mentioned above. But the positives outweigh the negatives. And all of this means the growth we've seen from Nvidia and its shares could be far from over — and may be set to continue over the long term.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool recommends Amgen and Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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