Nvidia Corp.’s sales of hardware needed for artificial intelligence have taken off and sent the chip maker’s stock into the stratosphere, early proof that a new era has arrived for tech.
Now investors are wondering where the chip maker — and the larger tech sector — heads from here, after Nvidia NVDA,
As the internet arrived in the 1990s, a hardware company convinced investors that the dot-com boom was real, showing similar huge revenue gains to what Nvidia is sporting today. Cisco Systems Inc. CSCO,
The company then added another $2 billion in sales in each of the next two years. Sales jumped even more in 1999 and 2000, when Cisco reported nearly $19 billion in annual revenue.
The networking build-out of the late 1990s proceeded to hit a snag, though. Growth slowed in late 2000 and early 2001, then reversed to a revenue decline in 2002, as the internet didn’t take off as expected. Many of the companies that expected to see huge consumer and enterprise dollars flowing onto the web failed to live up to that vision, leading to a huge flameout for Cisco’s stock.
Eventually, that money did flow to the internet, but it took the rise of smartphones to truly realize the promises made during the late 1990s. Apple Inc. AAPL,
While growth did slow from there for Apple, it did not come close to the cliff that Cisco experienced, and the overall tech sector easily withstood a growth slowdown at Apple. What was the difference? While Cisco’s hardware sales failed to spark widespread revenue gains throughout the larger tech sector, Apple’s did, thanks to the immediate success of mobile apps sold through the App Store.
In a new era of technology, it is always hardware sales that lead, and other companies eventually develop software and services that take advantage of that hardware. In the case of Cisco, the online services developed did not find immediate success.
For Apple, though, there was a near-immediate wave of innovation that created mobile apps like Uber Technologies Inc.’s UBER,
Analysts have already compared Nvidia to Apple, largely because of the chip maker’s large profit margins and its mature and important Cuda software, a proprietary offering much like Apple’s.
“While Apple never sold the majority of global smartphones, it generated most of the profit in the industry and still does. Nvidia has established itself as the heir apparent in our view — with a prescient full-stack approach that makes it much more than a chip company,” Melius Research analysts wrote in July.
To forecast Nvidia’s success, it’s therefore helpful to think about companies like Microsoft Corp. MSFT,
For Nvidia to follow Apple’s example, those customers will need to succeed with their new offerings no more than a couple of years down the road. Nvidia executives have not provided financial guidance more than a quarter ahead, but analysts have suggested this wave of investment is unlikely to continue beyond that without such a surge from other tech companies.
“While gauging the magnitude and trajectory of capacity additions and AI demand may be foolish to predict, we suspect that we likely have another 12 – 18 months+ of unbridled AI infrastructure build-out, but things look murkier beyond that,” Bernstein analysts wrote in late July, while looking at other historical comparisons for Nvidia’s success.
Examples of huge demand for chips building and then suddenly disappearing are prevalent in Nvidia’s history. Demand for cards used to mine cryptocurrency fell off in 2018, leading to a “crypto hangover,” and the end of pandemic-era demand for gaming cards last year dinged sales and the company’s stock ahead of the current spike.
But Nvidia executives insist that the company does not need the current interest in generative AI — the approach that made ChatGPT famous — to continue its success. Chief Financial Officer Colette Kress told MarketWatch last month that while “generative AI was the ‘a-ha moment’ for enterprises to understand how AI works and how they can apply it,” Nvidia’s technology will be used for a much wider variety of AI use cases, mentioning drug discovery and powerful supercomputers.
Nvidia should continue to put up strong numbers for the next couple of years, and its stock is unlikely to crater in that time. Whether the stock can rack up continued strong gains in that period is more uncertain, however, though the current valuation seems to bake in the revenue gains being maintained at the very least.
If Nvidia is like Apple, with an ecosystem that will spur software innovation in the coming years that will convince companies to continue buying their gear, then buying in now could be like buying Apple stock in, say, 2008. But if you believe it will take longer for the AI era to show that fruit, then there could be a dip coming that would allow for a better buying opportunity — after all, Cisco’s market capitalization has tripled from the depths of the dot-com bust and the stock has joined the blue-chip Dow Jones Industrial Average DJIA.