In recent months, the tech world has witnessed a meteoric rise in Nvidia's market performance, notably rising by an astounding 240% in 2023 and an additional 60% in just the first two months of this yearThis surge propelled Nvidia to a market capitalization nearing $2 trillion, landing it among the top three companies on the U.Sstock marketIts valuation is staggering—equivalent to three times that of TSMC, seven times AMD, and ten times Intel, solidifying its position as the undisputed leader in the global semiconductor industry.

Not only has Nvidia's stock price soared, but its average daily trading volume has also surpassed that of Tesla, making it one of the hottest stocks among investorsSuch achievements have been underpinned by robust financial results that pushed its stock price beyond the $800 mark.

Strong earnings reports have led the stock price to breakthrough the $800 threshold.

In its latest earnings report, Nvidia reported fourth-quarter revenues of $22.1 billion for 2023, a staggering 265% year-over-year increase

The company’s data center business generated $18.4 billion, marking a phenomenal 409% growth, while the gaming division also enjoyed a substantial 56% increase in revenueA net profit of $12.3 billion for the quarter, up 769% from the previous year, not only exceeded expectations but also established record highs for the third consecutive quarter.

Furthermore, Nvidia’s projections for the first quarter indicate revenues could reach $24 billion, surpassing market forecastsThe strong demand for AI chips has significantly mitigated the adverse impacts of U.Sexport restrictionsFollowing the earnings announcement, Nvidia's stock experienced a remarkable 16.4% jump, inching towards the $830 markJust last Friday, on March 1, Nvidia's stock surged again by 4%, nearing the elusive $830 wall.

Following the significant stock price increases...

Market sentiment remains overwhelmingly optimistic.

The exponential growth in the need for vast computational power to train and infer AI models, processes data for cloud service providers, and serve diverse business demands, has led to a surge in demand for AI chips

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Nvidia, having invested in this field for years, commands a staggering 80-90% market share in the AI chip sectorMajor cloud service platforms like Amazon’s AWS, Microsoft’s Azure, and Google Cloud, alongside numerous tech startups, are fervently procuring Nvidia chips to satisfy the skyrocketing computational needs of the AI eraThese clients represent Nvidia’s biggest customer base.

In the nascent stages of the AI revolution, Nvidia has transitioned from merely being a “GPU supplier” to emerging as a "leader" in the AI landscape, a shift that justifies its soaring stock performance.

Despite the substantial rise in stock prices and market capitalization, the optimism surrounding Nvidia has not wanedThis resilience reflects not only the market’s confidence in Nvidia but also an anticipation of the broader industry's potential.

During this earnings report, Nvidia's CEO Jensen Huang stated, “Accelerated computing and generative AI have reached an inflection point.” The CFO indicated that demand for the next-generation product, the B100 chip, is expected to far exceed the supply capacity

According to an analysis by Statista, the market valuation of global AI sector companies is projected to skyrocket from its current levels to nearly $2 trillion by 2030. In this pathway filled with possibilities, Nvidia possesses a formidable first-mover advantage.

In a bid to reduce reliance on Nvidia's chips, major tech firms such as Google, Amazon, and Microsoft have initiated their own AI chip research and development projectsThe largest customers could emerge as significant competitors in the futureConcurrently, AMD, a long-standing rival, has launched its MI300 series AI chips, while Intel has introduced Gaudi3. Nvidia's monopoly might face challenges in the near future, yet its industry dominance is unlikely to be genuinely threatenedThe combination of CUDA, a parallel computing platform and programming model developed in 2006, with their high-performance chips remains a ‘killer’ combination

This complete AI ecosystem not only enhances user retention but also establishes a formidable moat that other tech giants would find hard to breach in the short term.

Nvidia's absolute advantage...

Looks likely to be sustained for at least the next two years.

Underlying Nvidia's high valuation is the capital market's recognition of its increasing profit potentialAs of January 28, Nvidia’s gross margin was reported at 76%, with a net profit margin at 56%, and a return on equity (ROE) of an impressive 129%. Each of these metrics set new historic highs, significantly outpacing its industry counterparts.

With a forward price-to-earnings ratio of 32, the market anticipates continued rapid earnings growth for the next year

However, two looming uncertainties remain: U.Sexport controls and internal production capacity constraints.

As per Tipranks, over the past three months, 40 analysts have reviewed Nvidia, with 38 recommending a ‘buy’ and only 2 advising to ‘hold’. The average target price for the next year has been set at $886.52, with the highest prediction reaching $1,200.

Nonetheless, opinions on Nvidia's stock price outlook show some divergence across the spectrumProponents argue that Nvidia could see its data center revenue triple year-over-year in fiscal 2024, followed by another doubling in fiscal 2025. Continuous growth in Gen AI infrastructure spending from major cloud service providers and consumer internet companies is anticipated, as well as increased investments from various industry-specific enterprises and sovereign states in AI development and applications

In the short term, a slew of new products set for release including the H200 (which is expected to double the inference performance of the H100), B100 (next-generation data center GPU platform), and Spectrum-X (AI network solution based on Ethernet) will likely bolster demand, alongside improvements in supply constraints, with potential to enhance an already robust demand backdrop.

Conversely, some institutions hold a more cautious perspectiveFrom a mid to long-term view, challenges facing Nvidia’s data center GPU business include intensified competition in the general-purpose GPU landscape, particularly from AMD and Intel entering this marketWhile Nvidia is likely to dominate with a market share of 70-80% in the long run, compared to its current 90%, it does signify some deterioration in the competitive landscape, potentially hampering its ability to maintain such high prices and margins

On the other hand, each cloud service provider (CSP) – like Amazon’s AWS and Microsoft’s Azure – has strong motivation and capability to develop their dedicated AI acceleration chipsWhile the near-term feasibility of offering general-purpose compute services seems limited, the internal development of such chips to replace part of Nvidia's current offerings is certainly underway.

When discussing the challenges over the mid to long term, it is essential to note that the current factors do not pose immediate headwindsThe prevailing question remains: why aren’t firms presently considering using AMD GPUs? The answer lies in several areas; primarily, firms need time to get AMD GPUs operational, and the time required could impede product development speed, which could delay their market entry compared to competitors

Hence, Nvidia’s CUDA currently maintains a wide moat.

Moreover, Nvidia's exclusive manufacturer for the H100 GPUs is TSMC, which also has its CoWoS capacity occupied by NvidiaWhile the MI250 may seem a viable solution, it is not readily available eitherOnce the H100 is adopted on a large scale, it is anticipated that the A100 will be utilized more for inferenceIn contrast, the V100's lack of Bfloat16 data type complicates model training, leading to its minimal use among vendors.

Given these factors, it seems reasonable to expect Nvidia's absolute advantage to endure for at least the next two years.

(This article represents the personal views of the author and does not reflect the position of this publicationThe stocks mentioned are for illustrative purposes only and do not constitute investment advice.)