Nvidia Stock Just Did Something Important

Nvidia  (NVDA) - Get Free Report has been setting the pace for stocks this year. The company best known for graphics processing units (GPUs) used in gaming consoles and PC gaming has skyrocketed because it's likely to be a prime beneficiary of investment in artificial intelligence. 

Because large language models require significant computing power, existing CPU-centric servers are less than ideal for training or operating them. As a result, the artificial intelligence revolution is expected to result in billions of dollars of upgrades to existing network infrastructure. 

A lot of that money is likely heading to Nvidia. Investments in software that make its next-generation chips efficient have made it the top choice for those looking to create AI solutions. The potential to capture billions of dollars in new spending has caused shares to reach an important point for shareholders.

Nvidia's Big AI Opportunity

The market for energy-efficient chips with enough power to train and operate generative AI is taking off following the success of OpenAI’s ChatGPT.

ChatGPT was the fastest application to reach 1 million users following its launch on Nov. 30. Since then, companies have been scrambling to embed AI into their offerings, creating a gold-rush-style interest in AI infrastructure providers.

On Nvidia's latest earnings conference call, CEO Jensen Huang suggested existing data centers are ill-equipped to handle AI workloads. Upgrading legacy systems to next-generation chips could mean billions of dollars in new orders heading Nvidia's way.

Nvidia's latest guidance shows the needle-moving potential associated with surging AI investment. It expects a surge in demand will allow its revenue to reach $11 billion this quarter, up from $6.7 billion last year. That's a dramatic increase at a time when many companies are reporting revenue declines because of economic headwinds. 

A Competitor Emerges in Advanced Micro Devices

The possibility for revenue to increase substantially caught investors off guard. Nvidia's shares have soared following its upbeat guidance. However, the next-generation chip market has attracted key competitors' attention.

Advanced Micro Devices, or AMD, has long competed against Nvidia in GPUs used in video gaming. On Tuesday, it held a pivotal conference to discuss how it similarly plans to battle for AI market share.

The company is still developing software to make its AI chips more competitive with Nvidia, but it still thinks that its latest chip, MI300, can carve away sales in this emerging market. 

In AMD’s presentation, CEO Lisa Su said AI is the largest and most significant long-term opportunity for her company. She also noted that the AI accelerator market will grow at a compounded 50% rate annually through 2027, increasing from $30 billion to over $150 billion.

She didn't disclose pricing for the MI300, but she did say that the content-packed chip, which is about the size of the palm of her hand, would provide customers with a potentially lower total cost of ownership. If so, that could dent demand for Nvidia's H100 chips, which cost over $30,000 apiece.

Nvidia's Shares Make an Important Move

Word of a looming competitor didn't dent interest in owning Nvidia stock. Instead, AMD's interest in the blossoming market for AI chips encouraged investors to believe the market will be big enough to support multiple winners.

As a result, Nvidia's shares traded higher on Wednesday. But that wasn't what made the move in its stock so impressive. Instead, it was that the buying lifted Nvidia's shares to an all-time high on substantially higher volume than usual,

That's no easy feat. The stock market has been hamstrung by worry over a possible recession. As a result, many stocks are closer to their all-time lows rather than highs. 

What's Next For Nvidia's Stock

It's impressive that Nvidia's stock has reached new all-time highs. Many likely shorted company shares following its upbeat guidance because of concerns over its valuation. Those concerns remain. However, an old Wall Street adage could be in play: "Stocks can remain irrational longer than you can remain solvent."

The risk of unlimited losses may be forcing the hands of those who bet against shares because of its admittedly sky-high price-to-earnings ratio, which is nearly 44 based on expected earnings next year. That's certainly not cheap, but investors appear content betting that those estimates are likely to increase, making valuation appear more reasonable. 

Perhaps, more worrisome is that shares may be getting ahead of themself. The company's stock trades nearly 100% above the 200-day moving average. That suggests a relatively fast and extreme move higher that could signal shares are due for a breather. After all, stocks don't rise or fall in a straight line forever.

If so, the next move in Nvidia's stock may be at least sideways. If shares pull back, there will likely be a floor beneath them, given short sellers will be eager to try to cover to get out flat, and investors who missed the initial run-up will be chomping at the bit to add the stock to their portfolio. 

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