Sep. 06, 2023 5:32 PM ET NVIDIA Corporation (NVDA)
- While investors are focused on the big demand for Nvidia Corporation chips, they are missing the AI software growth prospects beneath the surface that will take the stock to higher levels.
- On the earnings call, executives shared valuable insights regarding Nvidia’s software business. Beneath all the technical jargon, the underlying revenue growth opportunities are actually simple to understand.
- Investors are now well-aware of the popular CUDA software, but the software growth opportunities extend beyond this, strengthening the bull case for the stock.
This article discusses the bullish case for Nvidia Corporation (NVDA), highlighting the company’s software growth prospects and its competitive advantage in the AI chip market. Here are the key points:
- Earnings Performance: Nvidia’s recent quarterly earnings report exceeded market expectations, with the company providing strong Q3 2024 earnings guidance of around $16 billion in revenue. Despite concerns about supply chain constraints, Nvidia seems well-prepared for the AI revolution, ensuring a sufficient supply of materials to meet high demand for its AI chips.
- Competition with AMD: Nvidia’s main competitor, Advanced Micro Devices, Inc. (AMD), is set to release its AI chip, the MI300. However, despite touting customer interest, AMD’s GPU sales are expected to be less than $500 million this year. In contrast, Nvidia continues to experience significant demand for its AI chips, including both the latest H100 GPU and the older A100.
- First-Mover Advantage: Nvidia’s first-mover advantage in the AI chip market is solidified by its popular CUDA software package, which accelerates AI frameworks and applications using Nvidia GPUs. Even if customers find the Hopper architecture too expensive, they can opt for the older Ampere architecture, which maintains Nvidia’s grip on the market.
- Software Ecosystem: Nvidia’s software ecosystem plays a crucial role in maintaining its competitive edge. The company’s software solutions, such as AI Enterprise, support various machine learning tasks, including data processing, model training, inference, and deployment. Nvidia’s GPUs, both in the field and in the cloud, are widely used, allowing for scalability from single GPUs to entire data centers.
- Software Revenue Growth: Nvidia’s software revenue growth potential goes beyond the absence of competitive alternatives. The company can monetize its software services through usage-based licenses, charging based on concurrent instances or sessions. With millions of GPUs in use across data centers, Nvidia’s software revenue scope is substantial.
- Network Effect: Nvidia’s ability to support more software instances than competitors’ chips attracts software developers. As developers optimize their software for Nvidia’s GPUs, more customers are likely to use Nvidia’s technology platform, creating a virtuous network effect. This growing ecosystem benefits Nvidia and its shareholders.
- Financial Implications: Software sales generally offer higher profit margins than hardware products, contributing to margin expansion. Nvidia’s software business is already helping to expand gross profit margins, with net margins reaching 46% in the last quarter. As software revenue becomes a larger proportion of total revenue, it should further enhance profit margin expansion and earnings growth.
- Valuation: Despite trading at a high forward earnings multiple (over 52x), the stock’s strong earnings growth justifies the valuation. The article suggests a dollar-cost averaging strategy for investors and views market corrections as buying opportunities for long-term investors.
In conclusion, the article maintains a bullish outlook on Nvidia, emphasizing the importance of its software growth prospects, competitive advantage, and potential for profit margin expansion. It suggests that investors should consider the company’s long-term potential and not be overly concerned with short-term fluctuations or competition from rivals like AMD.
