Nvidia Sees Support from AI Applications

Shares of Nvidia (NVDA) have rallied more than +22% so far this year, making it one of the S&P 500’s ($SPX) (SPY) top-performing stocks.  Investors have been buying Nvidia due to its potential to profit from the use of artificial intelligence (AI) applications.  Contributing to this year’s rally in Nvidia is speculation that Nvidia’s graphic chips will be needed for use in OpenAI’s ChatGPT.

The chatbot called ChatGBT, released late last year by OpenAI, is an AI application that can be used to mimic human writing.  Nvidia could see a boost in sales on speculation that students will flock to this new technology to write essay assignments.  Nvidia dominates the market for graphic chips designed for complex computing tasks needed to power AI applications.  Citigroup estimates that rapid growth in ChatGPT usage could result in sales for Nvidia of about $3 billion to $11 billion over 12 months.

Wells Fargo said upcoming chips from Nvidia are well positioned to take advantage of greater computing needs required by AI models like ChatGBT.  Also, Bank of America said Nvidia is at the forefront of the companies that will benefit from growth in generative AI.  Nvidia’s data center unit has expanded rapidly over the past two years as its graphic chips have become central for cloud computing applications.

However, some analysts want to see signs of stronger demand for the new AI applications before projecting stronger earnings for Nvidia.  Nvidia’s sales surged more than +50% in each of the last two years due to the pandemic, which sparked demand for video games and other stay-at-home activities. However, Nvidia’s revenue this year is projected to be flat at about $27 billion.

Despite the recent recovery, the price of Nvidia’s stock is still down by almost half from its record high posted in November of 2021.  Nevertheless, Nvidia remains one of the most expensive stocks in the Nasdaq 100 Index ($IUXX) (QQQ), with a P/E of 41 times projected 12-month earnings, well above its 10-year average.  Based on the average price target, analysts project Nvidia will climb +13% over the next 12 months to $200.68.  SPEAR Invest said the success of ChatGPT could fuel the development of more tools that require greater computing power and, therefore, more chips that could result in higher orders for Nvidia. 

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