Nvidia investors could be in for a windfall over the next few years.
There’s no denying that Nvidia (NVDA 0.61%) has been on fire since early last year. The stock has soared more than 750% as of this writing, driven higher by the potential implications of generative artificial intelligence (AI). The ability to streamline time-consuming tasks and automate routine processes promises to increase productivity and could unleash a wave of greater profits for businesses that adopt this cutting-edge technology.
Nvidia’s graphics processing units (GPUs) are the gold standard and provide the computational horsepower necessary for AI processing. This has let loose a tidal wave of demand for the company’s high-end processors, sending its business and financial results surging, resulting in its recent 10-for-1 stock split.
While some investors fear the easy money has been made, others believe the best is yet to come. One analyst suggests Nvidia has a killer advantage that will help it stay ahead of the competition and unleash a “cash gusher” that will profit shareholders.
Let’s see if the analyst’s argument holds water and what it means for investors.
Nvidia’s GB200 Grace Blackwell Superchip. Image source: Nvidia.
A long track record of success
To understand the source of this “cash gusher,” it helps to take a step back to see how Nvidia got to where it is today.
Nvidia’s state-of-the-art processors have long been the industry standard for serious gamers. The company controlled 88% of the discrete desktop GPU market in the first quarter, according to data compiled by Jon Peddie Research.
However, Nvidia adapted that same technology to zip data through the ether, becoming the go-to processor for data centers. Estimates suggest the company controls as much as 92% of the data center GPU market, according to IoT Analytics. Nvidia is also the undisputed leader in processing machine learning — an established branch of AI — with an estimated 95% of that market, according to data supplied by New Street Research.
Since much of generative AI processing occurs in the cloud and data centers, Nvidia has cemented its position as the leader. The company is set to release its Blackwell family of processors later this year, and CEO Jensen Huang has said, “The Blackwell Architecture platform will likely be the most successful product in our history.” If that’s the case, and I believe that it is, the best could be yet to come.
Furthermore, while the popular narrative says the competition is coming for Nvidia, thus far — despite years of opportunity — no serious competitor has emerged.
A “cash gusher”
Melius Research analyst Ben Reitzes believes Nvidia has one killer advantage that some investors may be overlooking, one that will keep the company on the leading edge of technology. Nvidia provides not only the chips that are tailor-made for AI but also the integrated software that eeks every last ounce of performance from these AI-centric processors. This “full stack” approach, or the marrying of hardware and software, provides Nvidia with a key advantage that will be hard for rivals to match, particularly given the company’s long track record of leadership in the field.
“What they did is they built a computing language and an ecosystem that allows you to monetize AI, and obviously, they’re killing it,” Reitzes said.
The analyst goes on to note that the cadence of Nvidia’s research and development (R&D) makes it hard for competitors to keep up. The company recently increased its already relentless pace of innovation, as CEO Jensen Huang said the company is now “on a one-year rhythm,” releasing new processors every year instead of every two years. “They’re running 150 miles an hour while everyone else is running 100. It’s going to be hard to catch these guys,” Reitzes said.
As a result of the accelerating adoption of AI and Nvidia’s dominant position, it’s estimated the company will generate $270 billion in cash in the coming three years, which could unleash a wave of returns to shareholders in the form of stock buybacks and higher dividend payments.
The analyst notes that even with higher R&D spending, the influx of cash will far outweigh any potential uses, suggesting the majority will be returned to shareholders.
Investors are already seeing evidence of that shift. Late last year, Nvidia announced a new $25 billion share repurchase plan. Furthermore, in conjunction with its stock split announcement in May, the company increased its dividend payment by 150%. That said, Nvidia is currently using less than 1% of profits to fund the dividend, and even at its higher rate, the yield is a paltry 0.03%.
This illustrates that there’s still ample opportunity for Nvidia to return cash to shareholders, and with the ongoing tsunami of AI adoption, the company will have an increasing amount of resources to do just that. Furthermore, given its killer advantage, its unlikely a rival will take Nvidia’s crown, at least not anytime soon.