Last month, Alphabet (GOOG 1.25%) (GOOGL 1.32%) announced an $80 billion equity capital raise. The company made it clear that it was doing so to fund its aggressive spending on artificial intelligence (AI). While we can debate whether that’s good for the company — with some investors arguing that the massive spending won’t pay off and will only squeeze its profits and margins — there is one corporation for which this is a clear bullish sign: Nvidia (NVDA +3.74%). Read on to find out why.
Image source: The Motley Fool.
The hyperscalers keep battling it out
Alphabet’s massive $80 billion AI infrastructure build-out will flow into several areas, probably including Nvidia’s GPUs (Graphics Processing Units), which remain the workhorse of AI training. While it is true that Alphabet has sought to reduce its reliance on Nvidia’s hardware, notably by doubling down on internally developed custom AI chips, management has been explicit that Nvidia’s GPUs remain central to the company’s business. As Alphabet’s CEO, Sundar Pichai, said: “Nvidia GPUs are a core part of our AI accelerator portfolio.” That should remain the case for the foreseeable future. So, Alphabet’s increased AI spending is excellent news for Nvidia.
Today’s Change
(-1.32%) $-4.86
Current Price
$362.17
Key Data Points
Market Cap
Day’s Range
$358.03 – $367.75
52wk Range
$172.77 – $408.61
Volume
794.9K
Avg Vol
31.7M
Gross Margin
60.43%
Dividend Yield
0.23%
But we could go even further. The fact that Alphabet is spending even more to capitalize on growing AI-related opportunities strongly suggests that its biggest cloud competitors — Microsoft (MSFT 1.41%) and Amazon (AMZN 0.80%) — will likely do the same. Even beyond the hyperscalers, several other companies are doubling down on AI investments. That includes Tesla (TSLA 2.18%), whose long-term outlook is becoming increasingly tied to the technology. Tesla is also a major Nvidia customer. And for that matter, so is Space Exploration Technologies (SPCX 1.02%), the other public corporation headed by Elon Musk. The message that these (and other) CEOs are sending is crystal clear, and it is a bullish signal for Nvidia.
It’s a great time to buy the stock
Nvidia’s CFO, Colette Kress, said that AI infrastructure spending could reach between $3 trillion and $4 trillion by the end of the decade — according to some estimates, it was only $318 billion last year. If Kress is correct, we could be looking at an enormous remaining opportunity. Even with a more modest projection of $1 trillion by the end of the decade, Nvidia’s addressable market looks massive.
Today’s Change
(3.74%) $7.37
Current Price
$204.30
Key Data Points
Market Cap
Day’s Range
$195.09 – $205.15
52wk Range
$161.16 – $236.54
Volume
5.3M
Avg Vol
158.9M
Gross Margin
74.15%
Dividend Yield
0.14%
Yet the stock has been sliding over the past month, losing about 6% of its value. Meanwhile, Nvidia’s shares are trading at just 22.2x forward earnings, which is precisely the average for information technology stocks as of this writing. Given Nvidia’s solid lead in the GPU market, the vast remaining runway for growth, the company’s wide moat from high switching costs, and its current valuation, the stock looks like a no-brainer buy. Nvidia may not repeat the amazing performance it has had over the past five years, but it can still deliver solid results to long-term investors.
Prosper Junior Bakiny has positions in Alphabet, Amazon, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
