In the weeks since the ChatGPT artificial intelligence tool took the world by storm, Nvidia Corp. has emerged as Wall Street’s preferred pick for traders seeking to profit from its potential. The chipmaker’s stock has rallied 29% since the start of the year, placing it among the best performers in the S&P 500 Index. Contributing to the gains has been the hype around the chat bot released by OpenAI late last year that has demonstrated an uncanny capacity to mimic human writing.
The rationale is simple: Nvidia dominates the market for graphics chips designed for complex computing tasks needed to power AI applications. The more people use ChatGPT, the more computing power its owner OpenAI requires to generate responses to the millions of queries received from lazy students with essay assignments or struggling songwriters.
On Monday, Microsoft Corp. announced that it was making an investment in OpenAI that is said to total $10 billion over multiple years. The funding is needed by OpenAI to ramp up computing power and will likely only bolster demand for Nvidia chips. Shares of Nvidia jumped as much as 6.5% following the announcement.
Last week, Citigroup Inc. estimated that rapid growth in ChatGPT usage could result in sales for Nvidia of $3 billion to $11 billion over 12 months. Analyst Atif Malik, while acknowledging the difficulty in modeling growth for such a nascent service, based his values on projections for number of words generated by ChatGPT and revenue per word for Nvidia.
“We believe Nvidia has in ChatGPT a potentially meaningful compute demand driver,” Malik wrote in a research note last week. Bank of America Corp. also said that Nvidia is at the forefront of the companies that stand to benefit from growth in so-called generative AI. Wells Fargo & Co. said upcoming chips from Nvidia are well positioned to take advantage of greater computing needs required by AI models like ChatGPT.
Of course, it’s possible that the service is just the latest fad to sweep through the tech industry only to fizzle like orders from cryptocurrency miners, which have surged and crashed multiple times over the last few years. Nvidia investors, and those who put money into other semiconductor makers in late 2021, know that the promise of continuous growth can be an illusion. After sales surged more than 50% in each of Nvidia’s past two years, revenue is projected to be flat in fiscal 2023 at about $27 billion.
Nvidia shares have lost almost half their value since peaking in November 2021. Despite the selloff, the stock remains one of the most expensive in the Nasdaq 100, with a price that’s about 41 times profit projected over the next 12 months, well above its average over the past decade. Analysts see the stock gaining 13% to $200.68 over the next 12 months, based on the average price target.
Whether or not ChatGPT itself results in higher orders for Nvidia, Ivana Delevska, chief investment officer at SPEAR Invest, believes its success will fuel the development of more tools that will require greater computing power and therefore more chips. “People will look at how popular it has become and can see how this sort of thing is going to be a big deal,” said Delevska, who counts Nvidia among the firm’s top holdings. “That could mean more and more interest in this space, which will lead to a ton more investment from all kinds of companies wanting to catch up.”
It’s worth noting that the success of ChatGPT and the potential for increased demand for Nvidia’s chips is just one aspect of the company’s overall performance. As with any investment, it’s important to consider all factors before making a decision. While the hype around ChatGPT may be driving the stock up in the short-term, it’s important to consider the company’s overall financial performance and future growth prospects.
Nvidia has had a strong run in recent years, with sales surging more than 50% in each of the past two years. However, revenue is projected to be flat in fiscal 2023 at about $27 billion, which may give some investors pause. Additionally, Nvidia shares have lost almost half their value since peaking in November 2021, and the stock remains one of the most expensive in the Nasdaq 100, with a price that’s about 41 times profit projected over the next 12 months, well above its average over the past decade.
It’s also worth considering the potential risks associated with ChatGPT and other AI applications. While the technology may be promising, it’s still relatively new and there’s a chance that it could fizzle out like previous tech trends. Additionally, there may be other companies that also stand to benefit from the growth in generative AI, so it’s important to diversify your portfolio accordingly.
Overall, while the potential for increased demand for Nvidia’s chips due to the success of ChatGPT is certainly noteworthy, it’s just one aspect to consider when assessing the company’s overall performance and potential for future growth. As always, it’s important to do your own research and consult with a financial advisor before making any investment decisions.
