Nvidia: A Timely Opportunity Before Feb. 26?

Nvidia Corporation (NASDAQ:NVDA) has been making waves in the tech industry, with its stock price rallying by 27% in May alone. The company's market capitalization has reached an impressive $2.7 trillion, making it the third most valuable public company in the world, behind only Microsoft and Apple. But is Nvidia a bargain buy before Feb. 26, or is the rally unsustainable? Let's dive into the evidence to find out.



AI Chip Market Dominance

Nvidia's recent success can be attributed to its dominance in the AI chip market. The company controls between 70% and 95% of the market for AI chips used for training and deploying models like OpenAI's GPT (Mizuho Securities, 2023). This market share has allowed Nvidia to maintain a stunningly high gross margin of 78%, which is unusually high for a hardware company (Nvidia's Q1 2023 earnings report). In comparison, rival chipmakers Intel and Advanced Micro Devices reported gross margins of 41% and 47%, respectively, in the latest quarter.



Nvidia's flagship AI graphics processing units (GPUs), such as the H100, coupled with the company's CUDA software, have given it a significant head start in the market. This head start has created a "moat" around Nvidia's business, making it difficult for competitors to catch up. However, Nvidia CEO Jensen Huang has acknowledged the presence of powerful competitors and the potential threats to the company's dominance.

Soaring Demand for AI Processors

Nvidia's AI processors have seen a tripling in year-over-year sales for the third straight quarter, driven by soaring demand. This trend is expected to continue as AI adoption grows across various industries. Nvidia's revenue has been growing significantly, reaching $80 billion in the past four quarters. The company sold $34.5 billion in AI chips last year alone (Bank of America, 2023).



Innovation and R&D

Nvidia has committed to releasing a new AI chip architecture every year and developing new software to further entrench its chips in AI software. This commitment to innovation helps maintain Nvidia's competitive edge and ensures that the company remains at the forefront of the AI chip market.

U.S.-China Tensions and Competition

While Nvidia's dominance in the AI chip market is impressive, there are still potential threats to its position. The U.S. government's export controls on China could impact Nvidia's financials, as the Chinese market accounts for close to 20% of its revenue. Additionally, competitors like AMD, Intel, and even cloud computing providers are developing their own in-house chips to diversify supply lines and reduce reliance on Nvidia.

Valuation and Opportunities

Given Nvidia's high valuation, investors should be cautious when considering a purchase before Feb. 26. However, the company's strong position in the AI chip market, robust financial performance, and commitment to innovation present opportunities for those willing to take on the risks.

In conclusion, Nvidia's recent stock price rally is supported by its dominance in the AI chip market, soaring demand for AI processors, and commitment to innovation. However, investors should be aware of the potential threats to Nvidia's dominance, such as U.S.-China tensions and competition from other chipmakers. Before making a decision, investors should carefully consider the risks and opportunities presented by Nvidia's high valuation and market position.