On Monday, the stock price of Nvidia (NASDAQ: NVDA) will fall about 90%. But don’t worry, Nvidia holders — you’ll also have 10 times as many shares, as the company will perform the 10-for-1 stock split it announced on its May 22 earnings call.
Stock splits don’t change the underlying valuation of a company, but some think they’re reasons to buy a stock. Why? Because a lower share price could attract more retail investors who might not have the $1,200 required to buy a share of Nvidia today.
But with most brokers now offering fractional-share buying, splits may not pack the punch that they used to in spurring retail-investor buying.
One should never buy a stock based on what they think others may do in terms of buying or selling in the near term. Rather, one should focus on long-term fundamentals. And for Nvidia, those will be guided by these three all-important factors.
How wide a moat is CUDA?
Nvidia finds itself in such a strong position today because it has been so forward-thinking. The company began developing its CUDA software stack all the way back in 2006. CUDA allows developers to program graphics processing units (GPUs) to do parallel data processing, which is the reason developers have the ability to train artificial intelligence (AI)-models in the tens of billions or even hundreds of billions of parameters today.
Developers have grown accustomed not just to Nvidia’s chips, but also CUDA, and are likely reluctant to learn a whole new platform to program other accelerators. That’s especially true as companies currently are racing to train models and deploy them as quickly as possible. Nvidia has what’s known as a network effect with CUDA: The more it has become a standard for developers, the harder it is for competitors to break in.
However, investors will have to keep an eye out for competitive offerings. Companies are paying a fortune for Nvidia GPUs and would definitely like a compelling alternative.
Advanced Micro Devices (NASDAQ: AMD) is innovating its open-source RocM software platform, which it claims can port CUDA code over to program AMD’s MI300 line of GPUs. And Intel (NASDAQ: INTC) is perhaps making the biggest push, bringing in other technology giants into something called the UXL foundation.
UXL is committed to developing a pure open-source software platform that can program any type of hardware accelerator, based on the Intel OneAPI platform. With the serious backing of Intel, as well as other tech giants, it’s a threat to be taken seriously.
CUDA is a key to Nvidia’s moat. Investors should keep their eyes on the development of alternatives, and see whether they make any inroads within the developer community.
An unparalleled pace of innovation
Nvidia, perhaps sensing that its software moat may be under fire, made a big announcement last autumn that the company would be doubling its pace of innovation. Going forward, Nvidia will proceed from introducing a new chip architecture once every two years to once every year. On that note, the company recently introduced its new chip architecture for next year, code-named Blackwell.
Blackwell will boast 2.5x to 5x the performance of the prior Hopper architecture, depending on the use case. When packaging Blackwell into a new 72-Superchip cluster with Nvidia’s updated networking technology, that cluster can achieve a stunning 30x better performance over a similarly sized Hopper cluster.
Blackwell was just announced back in March, but at the recent Computex 2024 conference in Taiwan, Nvidia CEO Jensen Huang decided to announce the next architecture after Blackwell, code-named Rubin. The company didn’t disclose any performance specs around Rubin, but what can be assured is it will offer an even greater leap in performance over Blackwell.
Now, Nvidia is raking in the cash, giving it a massive amount of resources to invest in future innovation over AMD, Intel, cloud giants’ in-house accelerators, and other venture-backed competitors. But like in software, competitors aren’t standing still.
Also at Computex, AMD announced it would now be moving to an annual architecture cadence. And Intel is investing heavily in progressing through “five new nodes in four years” as it seeks to exceed Nvidia fab partner Taiwan Semiconductor Manufacturing (NYSE: TSM) in terms of transistor leadership. If Intel achieves its road map and surpasses TSMC in terms of raw manufacturing capability, that would be an interesting competitive volley.
Both competitors are definitely in catch-up mode, and both have a minuscule share of the AI chip market today. But these efforts are something to watch out for, even as Nvidia plows ahead with Blackwell and Rubin.
How big is the AI chip market?
Finally, another reason to buy Nvidia is the size of the future AI chip market itself. Of course, the ultimate size of the market is currently the subject of debate.
Some tech specialists believe the current AI market is overhyped and may peter out as today’s boom turns up disappointing results. Look no further than an article in last weekend’s Wall Street Journal in which a highly opinionated article proclaimed the AI revolution was “losing steam” in terms of end-user benefits.
Others disagree. Interestingly, some of the biggest beneficiaries of AI today aren’t consumers, but tech enterprises themselves that are using AI to write code that would take lots of man hours, or even help in designing semiconductors themselves. According to Deloitte, the 2027 AI chip market could fall anywhere between a conservative $110 billion to the more aggressive $400 billion recently put forward by AMD CEO Lisa Su.
Nvidia just recorded $22.6 billion in data center revenue in the past quarter. Of that, $19.4 billion was made up of computing chips, with the other $3.2 billion in networking revenue. So last-quarter’s results put Nvidia at an $80 billion run-rate already. If the AI chip market growth slows to reach just $110 billion by 2027, it would be very bad for Nvidia, given its current valuation.
However, a $400 billion AI chip market would be more like it, and the more likely outcome. TSMC recently predicted on its last earnings call that the AI chip market would grow at a 50% annualized growth rate through 2027. Conservatively assuming an $80 billion market this year, that would translate into a $270 billion market in 2027.
Needless to say, the ultimate size of the end market is important for any stock that trades at a 71 price-to-earnings ratio, as Nvidia did after Thursday’s close. Investors should keep an eye out for new AI chip forecasts, as well as end-customer use cases, as these are further refined by leading industry participants.
Pay no attention to a stock split
While a stock split may get major headlines, more important to Nvidia’s story is the strength of its software moat, its pace of innovation vis-à-vis its peers, and the total market size for AI chips, which will be predicated on the usefulness of AI. Those are the factors that investors should concentrate on beyond next week.
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Billy Duberstein and/or his clients have positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Nvidia’s 10-for-1 Split Isn’t a Reason to Buy the Stock, but These 3 Reasons Are was originally published by The Motley Fool
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