NVIDIA told a story about "AI being a brand new industry," and Wall Street believed it.

Source: Wind

Major technology companies are investing in artificial intelligence at an astonishing pace, with most of the funds flowing to chip manufacturers. Both NVIDIA and Wall Street believe that the current AI industry is a brand-new sector, with NVIDIA being the biggest beneficiary.

This Wednesday, NVIDIA announced quarterly sales of $22.1 billion and forecasted a further increase to $24 billion this quarter, more than triple the same period last year, surpassing Wall Street's optimistic expectations.

NVIDIA's co-founder and CEO, Jensen Huang, stated on Wednesday, "Last year, we saw the emergence of AI as a truly new application space, a brand-new way of computing. A new industry is forming, which is driving our growth."

After a year of capital pursuit, some chip executives and analysts believe that the prosperity of artificial intelligence is becoming increasingly sustainable. While AI is a hot topic in Silicon Valley and a top priority for major tech companies, it has not yet penetrated the corporate world and daily life, providing more opportunities for companies that can leverage AI.

Intel CEO Pat Gelsinger said at a company event on Wednesday, "This is changing everything in the field of computing."

In recent months, tech companies have been investing heavily in AI. Meta CEO Mark Zuckerberg announced in January plans to purchase AI chips worth billions of dollars from NVIDIA this year. Google recently launched a new, more powerful Gemini AI system. Microsoft has its own AI assistant tool and has acquired a large number of NVIDIA's most advanced chips.

Jensen Huang believes that AI is unleashing a new wave of investment worth trillions of dollars, which he believes will double the number of global data centers in the next five years and bring huge new market opportunities for NVIDIA.

NVIDIA's chips power all the most advanced AI systems, with the company's market share estimated to be over 80%. NVIDIA's stock price has soared, with a valuation close to $2 trillion, placing it among the top five most valuable companies in the United States. Wall Street clearly shares this belief.

Jamie Zakalik, an analyst at asset management firm Neuberger Berman, stated after NVIDIA's performance announcement on Wednesday that major tech companies are being driven by competition to continue investing in AI, which helps drive the ongoing AI wave, although few companies can establish profitable businesses from it.

Jamie Zakalik said, "AI is really important. I don't think it's a hype cycle like the metaverse a few years ago. I believe it can fundamentally change how people interact with computers and how many people work."

The surge in AI began at the end of 2022 when OpenAI widely introduced its ChatGPT tool. Public fascination with ChatGPT's ability to generate human-like language led to significant investments in OpenAI in the capital markets and spurred its competitors. Improving complex AI systems like ChatGPT requires more and more chips manufactured by NVIDIA and its competitors. The trend could be a good sign for NVIDIA's sales trajectory. Jamie Zakalik mentioned that although many industry observers expect the growth of AI chips to slow down at some point, the current frenzy of competition among tech companies in the AI race may overshadow the typical fluctuations in the industry for a while.

NVIDIA's leading position in the AI chip field is not without controversy, as its groundbreaking performance has angered competitors. These competitors have also made some progress, including Advanced Micro Devices (AMD), which is expected to reach $3.5 billion in AI chip sales this year.

Even some of NVIDIA's largest customers are cautious about the company's dominant position and healthy profit margins in the AI field. They are actively producing their own AI chips to replace NVIDIA. For example, Google has been designing internal AI chips since 2016; Amazon has been producing AI chips since 2019; and Microsoft will launch its first AI chip in 2023.

NVIDIA's prosperity largely depends on a few key companies. NVIDIA disclosed that 19% of its sales in the previous fiscal year came from a single end customer. Although the company did not reveal the identity of the customer, cloud computing companies like Google, Amazon, and Microsoft accounted for over half of its data center department's revenue in the last quarter, totaling over $9.2 billion.

OpenAI sees Microsoft as its largest financial supporter and is also exploring ways to acquire AI chips. Earlier this month, OpenAI's CEO Sam Altman discussed with investors and government officials the construction of AI-related infrastructure, including chip factories, which could cost up to $7 trillion.

NVIDIA is currently benefiting from its first-mover advantage, as the company started investing in AI over a decade ago. NVIDIA has also developed a significant amount of software for healthcare, robotics, and other key applications of AI, with tools created for chip functionality becoming industry standards.

Huang Renxun said, "Software is essential for accelerating computing, which is the fundamental difference between accelerated computing and general computing that most people took a long time to understand."

Analysts at Truist Securities stated in a report that sales in some countries and regions have slowed down due to US export restrictions, and demand for NVIDIA's chips exceeds what they can supply. However, the company's "strong structural growth position in the field of AI remains robust as ever."

According to NVIDIA's earnings report, analyst Ben Reitzes from Melius Research expects the company's revenue to grow by 77% to reach $107.9 billion this fiscal year. The analyst has raised NVIDIA's target price from $925 to $1,000.