I'm starting to see a lot of Nvidia analysis that goes like this:
- Data center revenue growth is slowing down
- Competition from AMD and Intel is heating up
- 17x forward sales is simply too big of a premium for the stock
For me, Nvidia is starting to look like one of my favorite types of investments:
A great business that is currently priced high because of one revenue driver, but hasn't priced in a different revenue driver that will take longer (much longer- think 10 years) to materialize.
The Focus Is On The Wrong Revenue Driver, For Now
Nvidia's stock is up 127% year to date. That's fantastic. Wall Street didn't expect the gaming segment to be up 37% year over year. And they don't expect fantastic growth in gaming going forward. On that point I am in agreement.
So where will the growth come from? Data centers? Also no. Nvidia projected that a slowdown in sales in the fourth quarter will cause data center revenue to contract sequentially for the first time in more than a year and a half. Wall Street is pricing this in too, which is why the stock has stayed largely flat the last four months.
So what is the future revenue driver that makes me want to own this stock for the long haul?
The main thing to know about artificial intelligence is that it is expected to add $13 trillion dollars to global economic activity by 2030 (Source: Mckinsey
It is still very early for artificial intelligence adoption. The new technological capabilities enabled by AI are:
- Computer vision
- Natural Language Processing
- Virtual Assistants
- Robotic Process Automation
- @tyler let me know if I'm forgetting any 😂
Businesses thinking about adding these capabilities today are faced with stiff investment costs which will negatively affect cash flow in the near term. But companies that take the plunge should see an increase in positive cash flow of up to 120% (also according to Mckinsey).
The point? The huge $13 trillion AI opportunity is not priced into the market yet. And Nvidia is positioned perfectly to take advantage of it.
My thesis is that Nvidia is priced for perfection for its gaming and data center segments now. But in the next 2-3 years it will start showing off what it can do in revenue from AI use cases. And that will dwarf its current main revenue drivers.
I am a long term investor by nature. I like to buy and continually verify. Nvidia is a stock I have owned since 2017, but its also one I'm looking to open up a much bigger position in to hold for the next decade.
The way I see it, Nvidia has a shot at being one of the most valuable companies in the world by 2030. With that time horizon, and the likely S-curve adoption that AI is likely to go through, it's much better to be early and just hold with conviction than it is to try and time the perfect moment that Wall Street starts to realize the potential of AI.
What are your thoughts on $NVDA
? Do you like AMD more? What are your reasons?