Nvidia's Data Center "Real Estate" Is Under Pressure, and It's Only a Matter of Time Before Its Share Price Reflects It | The Motley Fool (2024)

Compute advantage isn't everything when it comes artificial intelligence (AI)-accelerated data centers.

Roughly 30 years ago, the evolution of the internet changed everything for corporate America. Although it took time for businesses to fully realize the potential that e-commerce brought to the table, it proved to be a game-changing innovation.

Since the mid-1990s, an assortment of next-big-thing technologies and trends have come and gone, seemingly all of which had the potential to change the long-term growth trajectory for businesses. Following three decades of trends struggling in the internet's shadow, artificial intelligence (AI) has emerged as the next great leap forward in innovation.

Nvidia's Data Center "Real Estate" Is Under Pressure, and It's Only a Matter of Time Before Its Share Price Reflects It | The Motley Fool (1)

Image source: Getty Images.

With AI, software and systems are tasked with handling jobs that humans would normally undertake or oversee. What gives the AI revolution such eye-popping potential is the capacity for AI-driven software and systems to learn without human intervention and evolve over time. This evolution can include becoming more proficient at assigned tasks, or perhaps learning new skills/jobs.

Although estimates vary wildly, which is perfectly normal for early-stage innovations, the analysts at PwC released a report last year that called for AI to add $15.7 trillion to the global economy by 2030. With an addressable market this massive, it means multiple companies can be big-time winners.

Arguably no company has taken the bull by the horns more than semiconductor goliath Nvidia (NVDA -6.46%).

Nvidia's operating expansion has been virtually flawless

Even factoring in Nvidia's nearly 20% pullback since hitting an all-time intra-day high of more than $140 per share on June 20, it's gained $2.45 trillion in market value in less than 19 months. No market leader has added this much value so quickly, which is likely why the company's board approved a historic 10-for-1 stock split in late May.

Nvidia's data center dominance explains why it's made history.

According to the analysts at TechInsights, Nvidia accounted for 3.76 million of the 3.85 million graphics processing units (GPUs) that were shipped to data centers last year. For those of you keeping score at home, this represents a 98% market share, which is effectively a monopoly on the "brains" powering decision-making in AI-accelerated data centers.

In addition to its first-mover advantages, Nvidia has seemingly set itself up for long-term success by maintaining its compute dominance. Currently, demand for its H100 GPU is off the charts. While competitors are busy trying to outpace the H100, Nvidia is preparing to launch its next-generation GPU platform, known as Blackwell, during the second half of 2024. Blackwell offers accelerated computing capabilities in a half-dozen arenas, including generative AI solutions and quantum computing.

In June, CEO Jensen Huang also teased the potential of its Rubin architecture, which is expected to be released in 2026 and will run on a new processor, known as Vera.

The company's CUDA platform is playing a key role in its success, too. CUDA is the toolkit used by developers to build large language models. Though a lot of emphasis is (rightly) placed on Nvidia's industry-leading hardware in AI data centers, its software is helping to keep customers contained within its ecosystem of products and services.

The final piece of the puzzle for Nvidia has been its exceptional pricing power, which has been fueled by AI-GPU demand demonstrably outpacing supply. When demand for a good or service outstrips supply, it's perfectly normal for its price to head higher. Over the previous five quarters (through April 28, 2024), Nvidia's adjusted gross margin has expanded by close to 14 percentage points to 78.4%.

Nvidia's Data Center "Real Estate" Is Under Pressure, and It's Only a Matter of Time Before Its Share Price Reflects It | The Motley Fool (2)

Image source: Getty Images.

Nvidia is about to run headfirst into a data center "real estate" problem

There's absolutely no question that Wall Street's leading tech companies and most influential businesses are aggressively investing in AI-accelerated data centers. What remains to be seen is if Nvidia continues to win a monopoly-like share of the "real estate" devoted to GPUs in high-compute data centers.

This year marks the first real competition that Nvidia's hardware is going to contend with. Advanced Micro Devices is expanding production of its MI300X GPU, which sells for considerably less per chip than Nvidia's H100. Meanwhile, Intel is also rolling out its Gaudi 3 AI-accelerating GPU on a broader basis in the second half of 2024.

Although AMD's MI300X and Intel's Gaudi 3 offer subtle advantages over Nvidia's H100 GPU, Nvidia's chips are expected to retain their compute advantage.

But here's the thing that investors are overlooking: Compute advantage isn't everything in AI-driven data centers.

Nvidia is currently unable to fulfill the massive demand for its chips. With AMD and Intel entering the picture, impatient buyers are liable to flock to their considerably less expensive hardware. This means less real estate in high-compute data centers for Nvidia to claim.

And it's not just external competitors that Nvidia has to worry about. In fiscal 2024, Microsoft, Meta Platforms, Amazon, and Alphabet collectively accounted for around 40% of Nvidia's net sales. While it's great news that Wall Street's most influential businesses are using Nvidia's chips to run generative AI solutions and train large language models, all four of these companies are also developing AI chips for use in their data centers.

Microsoft's Azure Maia 100, Alphabet's Trillium, Amazon's Trainium2, and the Meta Training and Inference Accelerator are all expected to complement Nvidia's GPUs in each company's respective AI data center. Even with Nvidia maintaining its compute edge, these complementary chips will remove valuable data center real estate from the equation. In plainer English, there's going to be less of a need for Nvidia's AI-GPUs moving forward.

AI-GPU scarcity is the catalyst responsible for driving Nvidia's pricing power into the heavens for more than a year. As new chips flood the market and begin securing valuable data center real estate, it's a virtual given that Nvidia's pricing power, along with its adjusted gross margin, will fade.

I'll also add that most businesses currently lack a clear plan or understanding of how to monetize their AI investments and generate a positive return.

As enterprise data centers evolve and mature, Nvidia is highly likely to lose share. For its investors, this is a recipe for ample downside to come.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet, Amazon, Intel, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Nvidia's Data Center "Real Estate" Is Under Pressure, and It's Only a Matter of Time Before Its Share Price Reflects It | The Motley Fool (2024)

FAQs

Is it a good time to buy Nvidia stock? ›

Shares of the graphics processing unit (GPU) maker have skyrocketed more than ninefold since the fourth quarter of 2022. Nvidia is up almost 130% so far this year. However, the stock has plunged around 17% in recent weeks. Despite this big pullback, some Wall Street analysts think Nvidia is still a no-brainer buy.

Why did NVDA stock drop today? ›

Nvidia stock fell sharply Tuesday, trading at its lowest level since late May as the market awaits Big Tech earnings and looks at potential competition in AI hardware. shares closed down 7% at $103.73. The tech-heavy Nasdaq Composite Index dropped 1.3%.

How to buy Nvidia shares? ›

How to buy NVIDIA stock on Public
  1. Sign up for a brokerage account on Public. It's easy to get started.
  2. Add funds to your Public account. ...
  3. Choose how much you'd like to invest in NVIDIA stock. ...
  4. Manage your investments in one place.

How much will Nvidia stock be worth in 5 years? ›

In five years, NVIDIA's stock is expected to be worth at least $3,000. Some analysts believe it could be worth significantly more, depending on the company's performance in emerging markets like AI, autonomous driving, and the Internet of Things (IoT).

Will Nvidia stock ever go back up? ›

Analysts project Nvidia to grow its net income by 140% year-over-year to $15 billion, and their average target price of $134 per share indicates strong belief in a bounceback for Nvidia stock, which was the best performer of any S&P component in 2023 and the first half of 2024.

Why is NVDA sinking? ›

Nvidia stock is losing ground in conjunction with recent earnings reports from two of the world's biggest and most influential companies. Alphabet and Tesla each issued second-quarter results and guidance yesterday, and the reports kicked off a substantial pullback across the stock market.

What is going on with Nvidia? ›

Nvidia's stock has dropped 13% in the past five days, influenced by geopolitical risks and recent tech sector challenges. Despite recent declines, Nvidia's revenue is expected to grow significantly, with new product developments and strong data center sales forecasted.

What is the target price of NVDA? ›

Stock Price Target
High$200.00
Low$15.00
Average$134.24
Current Price$112.28

Does Warren Buffett own Nvidia stock? ›

As of March 15, 44% ($159 billion) of the $366 billion portfolio Buffett oversees at Berkshire Hathaway was being put to work in three widely owned AI stocks -- and no, Nvidia isn't one of them.

Will Nvidia stock reach $1000? ›

Hence, based on current estimates, the chances of Nvidia's share price crossing $1,000 in the next decade appear slim. These projections, however, can change in case Nvidia makes even more dramatic advances in AI technologies in the coming years.

Who has most shares of Nvidia? ›

The largest owners of Nvidia stock are asset managers, such as BlackRock and Vanguard. These companies hold Nvidia stock in mutual funds and ETFs on behalf of their clients. Among individual investors, the largest shareholders are company insiders and board members, like founder Jensen Huang.

What is the long term forecast for Nvidia stock? ›

Nvidia Stock Price Forecast 2024-2025

Today, Nvidia traded at $1,095.95, so the price increased by 121% from the beginning of the year. The forecasted Nvidia price at the end of 2024 is $1,403 - and the year to year change +183%. The rise from today to year-end: +28%. In the middle of 2024, we expect to see $1,390.

What is a fair price for Nvidia stock? ›

As of today (2024-07-27), NVIDIA's share price is $113.06. NVIDIA's Peter Lynch fair value is $43.63. Therefore, NVIDIA's Price to Peter Lynch Fair Value Ratio for today is 2.59. During the past 13 years, the highest Price to Peter Lynch Fair Value Ratio of NVIDIA was 5.70.

Will Nvidia buy back stock? ›

To be sure, Nvidia has been returning capital to shareholders. In August, it announced a $25 billion repurchase program.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Tish Haag

Last Updated:

Views: 6279

Rating: 4.7 / 5 (47 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Tish Haag

Birthday: 1999-11-18

Address: 30256 Tara Expressway, Kutchburgh, VT 92892-0078

Phone: +4215847628708

Job: Internal Consulting Engineer

Hobby: Roller skating, Roller skating, Kayaking, Flying, Graffiti, Ghost hunting, scrapbook

Introduction: My name is Tish Haag, I am a excited, delightful, curious, beautiful, agreeable, enchanting, fancy person who loves writing and wants to share my knowledge and understanding with you.