Nvidia (NASDAQ: NVDA) stock surged by 24% in Thursday’s trading after the company posted a better-than-expected set of Q1 FY’24 results and provided Q2 revenue guidance that was well ahead of Street estimates. With the surge, Nvidia’s market cap is approaching the elite $1 trillion mark. Generative artificial intelligence has captured the imagination of the world following the launch of the viral ChatGPT chatbot late last year. Technology companies and developers have been scrambling to deploy generative AI into their applications and investors are counting on this to drive a windfall of sorts for Nvidia, whose server chips remain the go-to products for AI workloads. So is Nvidia’s stock surge warranted and is the stock a buy at current levels of around $380 per share? We don’t think so. Below, we take a look at Nvidia’s role in the AI space and why we believe the stock is overvalued.
Artificial intelligence workloads require a considerable amount of computing capacity, shifting the power balance away from central processing units made by the likes of Intel
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to Graphics processors, a market which Nvidia dominates. For perspective, advanced AI computers today have as many as eight GPUs but just one or two CPUs and this trend is only likely to scale through the computing industry as more applications use generative AI capabilities. Nvidia has a suite of chips tailor made for AI. For example, the company’s H100 GPU offers high-end computing capabilities focused on deep learning, machine learning, and other AI tasks and is optimized for data center environments. The Grace Hopper processors are custom-designed CPU chips developed by Nvidia to work in conjunction with GPUs for AI workloads. The company has been looking to develop an ecosystem of sorts around its AI tools, with its own programming languages, and software, which are helping the company to better lock in customers. Nvidia appears to be preparing well on the production front to handle the surging demand, indicating that it had procured substantially larger commitments from its suppliers. The strong demand and supply planning are being reflected in the company’s Q2 guidance, with revenue projected at $11 billion at the mid-point (translating into 60% year-over-year growth), compared to the Wall Street consensus of just $7.2 billion in sales.
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