The sudden rise of Nvidia (NVDA) stock has left many investors puzzled. While the company’s success is largely attributed to its involvement in AI technology, the specifics of this connection remain unclear to many.

Since the beginning of 2023, NVDA stock has experienced a staggering increase of over 210%. Comparatively, the stock is currently valued at 48% more than it was during the peak of the previous bull market in November 2021.

To gain a deeper understanding of this exponential growth, it is essential to explore the role of AI, cloud computing, and Nvidia itself.

AI, or artificial intelligence, revolves around rapid mathematical computation. Rather than focusing on processing instructions, AI is primarily concerned with executing complex tasks efficiently.

In the world of cloud data centers, there has been a shift from using inexpensive CPUs to GPUs produced by Nvidia. This alteration prioritizes speed over costs, as the industry believes that expenses can be recuperated over time.

Nvidia effectively positioned itself for this new era by acquiring Mellanox in 2020 for $7 billion, which now appears to be a significantly advantageous investment. Mellanox specializes in creating systems that facilitate data transfer between machines promptly and at a reduced overall cost. This acquisition allowed Nvidia to expand its offerings by creating a comprehensive hardware-software system tailored specifically for cloud computing.

The value of Nvidia’s technology was first exemplified when Meta Platforms (META) launched its AI Research SuperCluster early last year. The system displayed the benefits of investing in faster data processing for complex datasets.

Following Meta Platforms, Microsoft (MSFT) and other companies quickly joined forces with Nvidia or sought compatibility with their products. Even Snowflake (SNOW) aligned its operations with Nvidia’s technology.

Although Nvidia’s ability to integrate its chips into a software-driven system has secured its position as a leading supplier, analysts are questioning whether the current valuation is justified. With projected revenue growth of 36% and soaring profits, Nvidia is trading at 28 times its revenue.

However, skeptics argue that predictions of Nvidia holding 75% of the projected $300 billion AI chip market may be exaggerated. Competitors such as Microsoft, Meta, and Qualcomm (QCOM) are actively working to move AI workloads off the cloud, while Alphabet (GOOG) (GOOGL) is diversifying its investments towards Advanced Micro Devices (AMD). Lower costs will likely incentivize other cloud giants to explore alternative architectures within their control.

In conclusion, while Nvidia remains a promising business with ventures extending beyond hardware and software sales, caution is advised. As the nature of cloud computing and the client-server relationship in AI continues to evolve, the current valuation for Nvidia may not be in line with its fundamentals. Potential events such as major contracts with AMD or Intel (INTC), or the emergence of a competitive architecture developed by cloud giants, can impact Nvidia’s stock performance. Diversifying one’s investment portfolio is crucial in navigating the uncertainties of the market.

(Note: This article has been rewritten and reformatted to remove specific details and sources. The opinions expressed in this article are those of the writer.)


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