Stock Market

I was wrong about Nvidia (NASDAQ:NVDA) stock.

I called it overpriced. While it’s a long-term winner, I thought paying 23 times revenue was too much.

Nvidia’s first quarter earnings of $2.04 billion, 82 cents per share, and revenue of $7.19 billion, were well ahead of expectations. But what sent NVDA stock up nearly 25% was its guidance, to revenue of $11 billion in the current quarter.

That would be $44 billion over a year, bringing the forward valuation to 21 times revenue.

Marching to $1 Trillion

Nvidia makes computer chips, but it’s really a software company.

It’s Nvidia’s software that has led Cloud Czars to buy its chips for upgrades, ahead of rivals Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). Software scales, to everywhere hardware touches, and a software monopoly can be hard to dislodge.

That’s why Nvidia stands on the verge of becoming the first $1 trillion chip company. Analysts believe Nvidia is more like Microsoft (NASDAQ:MSFT) than Intel. Nvidia software sits at the bottom of the generative AI software stack. It’s what enables everything else, including Microsoft’s ChatGPT.

CEO Jensen Huang is happy to take advantage. AI is the third stage of Nvidia’s GPU rocket ship, following gaming and cryptocurrency. Each of those earlier booms ran out of steam, however. AI is expected to abide.

Upside is Limited

My problem is that Nvidia’s upside is limited.

Once computer chips are installed, and their software ensconced in the clouds, Nvidia’s work is done. Nvidia software enables AI applications, just as graphics processing enabled gaming applications. It doesn’t make them. Nvidia is not an applications company and, even if it were, it wouldn’t have the monopoly it enjoys at the operating system level.

Nvidia may not even get the whole AI cloud market. CEO Jensen Huang told his conference call that President Biden’s economic Cold War with China is tying the hands of the industry.

China, he says, is being forced to create its own solutions, and it will. America’s desire to decouple is giving Nvidia short-term gain, but long-term pain.

Right now, no one is listening. The inflection point for AI is here, Nvidia CFO Colette Kress said at the conference call, and analysts rushed out their buy orders.

AI will replace all sorts of white collar workers, according to analysts. Writers, artists, musicians, actors, even analysts. Those who remain will see huge productivity jumps. In five years the world will be utterly changed .

The Bottom Line

I’ve seen this movie before. I covered the Internet for a decade before the Web was spun. The late 1990s were glorious.

But most predictions from the start of that period were wrong. Bill Gates’ 1996 book The Road Ahead now looks hilarious. The internet that evolved from it, even the Microsoft that evolved, had little to do with his vision. Excuse me if I discount his current predictions of doom for Microsoft’s rivals.

The same is true for AI and Nvidia. AI will create enormous value, as the Internet did. But that will be spread in uncertain directions. When the reckoning comes a lot of business models will undergo rapid, unscheduled disassembly.

I didn’t sell my Nvidia shares before earnings but I’m looking for my parachute.

On the date of publication, Dana Blankenhorn held long positions in MSFT, AMD, INTC, and NVDA. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.