Nvidia, founded in 1993, is a global technology company primarily known for its Graphics Processing Unit (GPU) innovations. These GPUs, originally designed to enhance computer graphics for video games, have evolved to serve a variety of complex computing tasks.

Nvidia’s prowess extends beyond just hardware: the company has made significant strides in software development, particularly with its CUDA platform, which aids in AI and deep learning applications.

Over the years, Nvidia’s contributions have expanded to diverse sectors, including artificial intelligence, autonomous vehicles, and supercomputing. As a result, the company has emerged as a pivotal player in the tech industry, driving advancements that shape our digital future.

Nvidia has experienced impressive growth over the past decade but it didn’t always command a triple-digit stock price. For those who’ve followed the company since the late 1990s when it went public on the Nasdaq, Nvidia’s evolution offers a case study in perseverance, innovation, and market adaptation.

From humble beginnings in the late ’90s with a stock price under $1, Nvidia maintained steady, albeit modest, growth for many years. This period of stability, spanning from the early 2000s to around 2015, might have given the impression of a static company. However, during this time, Nvidia was laying the groundwork for its future, driving advancements in graphics processing units (GPUs) and expanding its foothold in the gaming industry.

Post-2015, Nvidia’s stock started to increase materially, mirroring the company’s expansion into new markets, such as data centres, artificial intelligence, and autonomous vehicles. These endeavours, combined with the continued growth of the gaming industry, propelled Nvidia into the spotlight.

During the latter part of the 2010s and the early 2020s, Nvidia soared to new heights. A notable surge came around the early 2020s, when the company experienced a sharp increase in stock value, shooting into the triple-digit range, reflecting its dominant position in multiple tech sectors.

As of 23rd of October 2023, Nvidia’s market cap sits at over $US1.02 trillion with a share price of $US413.87 — a testament to its stature. Moreover, its P/E ratio of 99.98, while on the higher side, indicates strong investor confidence in the company’s future earnings potential.

The journey from a sub-dollar stock price to a leading player in the tech market showcases Nvidia’s tenacity. Its history offers valuable lessons on the potential of tech stocks and how vision, combined with the right market conditions, can lead to extraordinary growth.

Given its leadership role in the GPU market and the broader tech industry, Nvidia’s performance in 2023 is a topic of keen interest to many investors. As we head into the final quarter of 2023, several key factors will determine the company’s trajectory, especially its position in the rapidly growing AI market.

The significance of artificial intelligence continues to soar, with applications spanning healthcare to autonomous vehicles. With its advanced GPUs, Nvidia is at the forefront of powering these AI-driven technologies. Senior Investment Specialist at Morningstar, Shani Jayamanne, notes: “We do believe that Nvidia’s prospects are tied to the prospects of the AI market in the short to medium term.”
For investors, this correlation underlines the importance of monitoring AI industry trends when evaluating Nvidia’s earning potential.

However, despite Nvidia’s strong foothold, competition is fierce. Jayamanne weighs in on this dynamic, highlighting that “Nvidia is the industry leader in GPUs, with AMD and Intel in hot pursuit”.

The pressure from these tech giants suggests that Nvidia’s supremacy could be challenged if a competitor catches up, emphasising the importance of continued innovation in Nvidia’s product line.

For many, the burning question is how Nvidia’s market leadership translates into its valuation.

“Nvidia’s valuation really hinges on whether, and for how long, the company can stay ahead of the rest of the pack,” Jayamanne says.

Investors should be attuned to this relationship, understanding that Nvidia’s long-term value is intrinsically linked to its ability to maintain its technological edge.

As 2023 comes to a close, Nvidia’s performance wil be influenced by industry trends, competitive pressures, and innovative prowess. Investors must watch these elements closely, interpreting them in light of expert insights, to make informed decisions about Nvidia’s prospects.

When analysing the future prospects of Nvidia, investors are met with a mix of strong indicators of growth coupled with potential headwinds.

The Bull Case

Nvidia’s dominance in the market has been built on a foundation of innovation and technological advancements. One of its core strengths lies in its GPU technology. As Jayamanne puts it: “Nvidia’s GPUs offer industry-leading parallel processing – this is when CPUs run two or more processors to complete a task.” In layman’s terms, this means their GPUs are adept at multitasking at a high speed, ensuring faster program responses.

Nvidia’s valuation really hinges on whether, and for how long, the company can stay ahead of the rest of the pack

This efficiency is highly coveted in PC gaming, where speed and responsiveness can significantly enhance user experience. “This is what PC gamers need to keep gaming,” she adds.

Beyond gaming, the versatility of Nvidia’s GPUs is also evident.

“The use cases for a stellar GPU keep growing—they are needed for endeavours, such as crypto mining, AI and possible future applications,” Jayamanne says.

This suggests that Nvidia’s GPUs, thanks to their high processing power, are well poised to cater to an expanding market that includes budding sectors like cryptocurrency mining and artificial intelligence.

Moreover, Nvidia’s prowess isn’t confined to hardware alone. Its software innovations, especially around the CUDA platform, set it apart.

“Nvidia’s GPU and CUDA software platform makes them the dominant vendor for AI model training,” Jayamanne says.

With AI integration becoming more prevalent, the demand for efficient model training platforms like CUDA is expected to surge.

On the autonomous vehicle front, Nvidia is also pioneering change. As Jayamanne notes, the company has a first-mover advantage in the autonomous driving market, which paves the way for adopting its Drive PX self-driving platform.

The Bear Case

In the volatile world of technology stocks, even giants like Nvidia face significant headwinds and uncertainties. While their current accolades are commendable, the path ahead is riddled with potential challenges.

“It’s hard to stay the industry leader in the tech space – Nvidia being the leading AI chip vendor may not last long,” Jayamanne says.

The CUDA platform, though currently a leader in AI training software and tools, is not without its potential pitfalls.

“CUDA is a leader in AI training software and tools, but there’s going to be greater competition,” Jayamanne says.

“In the past, software and tools like this have moved to open-source, which could destroy CUDA’s value.”

Furthermore, a significant portion of Nvidia’s acclaim is tied to its GPU business, a market heavily influenced by PC demand and, more recently, the volatile world of cryptocurrencies.

Jayamanne adds: “Nvidia’s GPU business is reliant on PC demand, and more recently crypto mining.”

The implication here is clear: Should there be a decline in either of these sectors, it would inevitably lead to reduced demand for Nvidia’s GPUs, potentially impacting their market share and revenues.

Understanding a company’s competitive advantage, or “moat,” can be pivotal in decision-making. A “moat” typically represents a company’s ability to maintain its market leadership, ward off competitors, and sustain its earnings.

“We believe that Nvidia has a wide moat. We award moats to companies that have sustainable competitive advantages,” says Jayamanne.

“Companies that have a wide moat can protect and grow their earnings over at least the next 20 years, and keep competitors at bay.”

Nvidia’s competitive advantage is rooted in two primary sources according to Jayamanne. The first originates from “intangible assets.” This essentially means Nvidia’s distinct capabilities that aren’t easily replicated or replaced. Their dominance in the GPU market, with over 80% share, per Mercury Research, is a testament to this. The key to their supremacy isn’t just about the hardware but also the intricate “software, frameworks, and tools required by developers to work with these GPUs”.

The second pillar of Nvidia’s moat revolves around the concept of “switching costs”. High switching costs signify customer loyalty and barriers to moving away from a particular product or service.

“The switching costs are with its CUDA platform for AI tools—it enables developers to use Nvidia’s GPUs to build AI models,” Jayamanne says.

This means that developers ingrained in the Nvidia ecosystem may find it challenging and costly to transition elsewhere, reinforcing Nvidia’s market position.

However, a company’s competitive advantages don’t operate in isolation. Its financial health and strategic investments are crucial in sustaining its dominance.

“They have a sound balance sheet, exceptional investments associated with the firm’s strategy and execution, and appropriate shareholder distribution policies,” Jayamanne notes.

This speaks to Nvidia’s prudent management and the strength of its financial backbone.

Yet, with every investment, risks and uncertainties are inherent. One significant factor to consider is the unpredictable nature of the AI market.

Furthermore, there’s looming competition which could challenge Nvidia’s position

“We think it is inevitable that leading hyperscale vendors, such as Amazon’s AWS, Microsoft, Google, and Meta Platforms will seek to reduce their reliance on Nvidia and diversify their semiconductor and software supplier base, including the development of in-house solutions,” Jayamanne says.

While both Nvidia’s bull and bear cases are telling, it’s essential to factor in individual investment strategies and preferences. For instance, Jayamanne notes that if an investor primarily seeks a consistent dividend income, “Nvidia’s payout ratio has been volatile, to say the least”. This may not appeal to those looking for stable returns.

Also, for those who don’t fancy a long-term commitment, waiting for Nvidia to capitalise on the AI revolution fully might not align with their investment horizon.

“If you are an investor that does not have a long time horizon for Nvidia’s prospects to ride the AI wave to eventuate, this may not be the investment for you,” he says.

“Ultimately, a good investment is acquiring a quality company at a great price, but also considering your financial goals.”

Lastly, for Australian investors, there’s an additional layer to consider—currency fluctuations. The value of the US dollar against the AUD can significantly influence returns.

While Nvidia showcases substantial competitive advantages and growth potential, investors must weigh these strengths against individual goals, risk tolerance, and external market conditions before deciding to invest.