DA Davidson: NVIDIA's "king" status is hard to shake, and gross margins are expected to remain high before 2030

According to Zhitong Finance APP, despite large cloud computing companies actively seeking to diversify their AI chip supply, Wall Street analysts believe that NVIDIA (NVDA.US) will still find it difficult to shake off its dominant position in the artificial intelligence data center market in the short term, with its high profit margins expected to persist until the end of this decade.

Gil Luria, head of technology research at DA Davidson, stated in an interview on Friday that due to the lack of sufficiently mature alternatives in the AI chip sector among hyperscale cloud service providers, NVIDIA currently holds strong bargaining power.

"These large cloud service providers actually don't have many options," Luria said. "They are still almost entirely reliant on NVIDIA's chips, which makes NVIDIA's maintenance of a gross margin level above 70% highly sustainable."

In recent years, with the rapid development of generative AI, major tech companies such as Microsoft (MSFT.US), Amazon (AMZN.US), Google (GOOG.US, GOOGL.US), and Meta (META.US) have continued to expand their investments in AI data centers, making NVIDIA the biggest beneficiary of this wave of AI infrastructure development.

Although these tech giants are attempting to reduce their dependence on NVIDIA by procuring custom AI chips from Broadcom (AVGO.US) and AI accelerator products from Advanced Micro Devices (AMD.US), the market generally believes that these alternative solutions are still in the early stages of development.

Luria pointed out that neither AMD nor Broadcom has yet formed a competitive advantage that can truly challenge NVIDIA. "Competitors are still in a very early stage of development, and large cloud service providers do not have strong leverage in negotiations."

Financial report data shows that NVIDIA's latest quarterly revenue grew by 85% year-on-year to $81.6 billion, once again setting a historical record; the adjusted gross margin reached 75%, far exceeding that of most semiconductor companies.

Luria maintains a "buy" rating on NVIDIA and sets a target price of $300. Based on Thursday's closing price, this target price implies that there is still about a 37% upside potential for the stock price.

However, as AI investment scales continue to expand, some investors have begun to adopt a cautious attitude towards the short-term growth prospects of large chip companies.

Despite NVIDIA's stock price having risen over 1300% in the past five years and the latest financial report released on May 20 exceeding market expectations, the company's stock price still experienced a pullback after the report was released. This reflects that investors' growth expectations for AI leading companies have reached extremely high levels, and merely exceeding expectations is no longer sufficient to drive the stock price to continue rising.

A similar situation has occurred with Broadcom. On Thursday, Broadcom's stock price recorded its largest single-day drop in over 16 months, as the company's outlook for AI chip business revenue failed to meet investors' increasingly high expectations.

In this regard, Luria believes the market reaction is somewhat excessive. "In fact, Broadcom delivered a very good report card," he said. "The company's revenue continues to show strong growth, but investors have now been trained to expect higher growth rates." As the AI industry enters a stage of large-scale commercial deployment, market attention on chip companies is shifting from pure high-speed growth to sustainability of growth and profitability. Against this backdrop, NVIDIA, which possesses technological leadership, ecosystem barriers, and economies of scale, is still regarded as one of the most competitive companies in the AI infrastructure sector