Nvidia (NASDAQ:NVDA) stands out as the king of all AI stocks in this market. Indeed, most investors (be they small or large) view NVDA stock as the key way to play the AI revolution. Given the company provides most of the high-performance chips required by companies in this space, it’s an easy pure-play to buy and hold, with clear upside momentum in terms of its growth and fundamentals.
That said, considering the company’s ballooning valuation amid increasing competition in this space, there are concerns. Add on top the fact that U.S.-China relations remain on rocky ground, and there’s already been a chip ban for certain AI-related chips, it’s unclear how robust this growth rate will be in one, two or five years from now.
So, what’s an investor looking to play the AI race to do? I think Nvidia may certainly feel the heat in the coming years, but it may not be dethroned from its pole position so easily.
Continued Challenge with Rivals
Following Wednesday’s launch of new chips targeting Nvidia’s AI computing dominance, Advanced Micro Devices’ (NASDAQ:AMD) shares surged 9%. AMD had initially projected over $2 billion in revenue from the chips next year but revised its AI chip market size forecast to over $400 billion in 2027, surpassing earlier estimates.
This indicated an opportunity for AMD and others to challenge NVDA stock, which currently holds over 80% market share in AI chips. AMD asserted its chips matched some Nvidia models in building complex AI systems and outpaced them in operation speed.
With around four decades of experience in financial markets, the belief is that assessing a company’s stock performance after a news release provides the best insights into the impact of the news. In this context, AMD’s entry into the AI chip market doesn’t necessarily spell bad news for NVDA, as NVDA has shown gains since the announcement of the MI300X in June.
Nvidia Is Resilient and More Advanced
Despite AMD announcing a chip to rival Nvidia, NVDA stock gained over 20% during the period, while AMD remained essentially flat. Traders and investors seemed skeptical about AMD’s potential as a real competitor to NVDA, raising doubts about AMD’s ability to develop a serious contender in the challenging realm of chip development and manufacturing.
The new AI chip revelation confirmed the success of AMD’s development program for the MI300X, signaling confidence in their product. Major players like Meta and Microsoft expressing openness to using the MI300X suggests potential success.
While it might seem like AMD’s gains would come at NVDA’s expense, the expanding market for AI chips, projected by AMD’s CEO Lisa Su to exceed $400 billion by 2027, implies that competition is necessary to meet the rising demand, making it a non-zero-sum game.
Nvidia Is the AI Game
In 2023, Nvidia experienced significant growth, securing approximately 90% market share in AI chips. With a soaring stock and robust earnings, Nvidia dominated the GPU market, crucial for AI model development. The company’s well-established position allowed it to meet increased demand for GPUs, leaving competitors struggling to catch up.
In Q3 2024, Nvidia witnessed a remarkable 206% year-over-year surge in revenue, accompanied by a staggering 1,600% increase in operating income. The notable growth was driven by a 279% rise in data center revenue, primarily from increased AI chip sales.
Despite its monumental success this year, questions linger about whether Nvidia’s earnings justify its robust stock performance or if it’s potentially overvalued. I believe that competition will likely take a bite out of Nvidia at some point, though the company’s business model has been resilient for well over a decade now. Thus, while I’m cautious about this stock for the time being, I can also see the long-term bullish thesis behind holding this stock for the long term. In my view, I’d rate Nvidia as a hold for those who own it now and a cautious buy on dips for those looking for exposure.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
