Nvidia is the leader in GPU manufacturing. The company sits comfortably as a ‘pick and shovel’ play in the AI chip gold rush. Since the release of ChatGPT, the stock is up 900%! Its GPU revenue has increased at an annual growth rate of 67% in the last 3 years and 2025 should be no different. However, many fear the demand for AI infrastructure, mainly driven by Big Tech companies, could stutter as soon as the tech companies change their spending plans. We look at how likely that scenario is, as it forms the foundation of the Nvidia bear thesis.
To understand the potential for future GPU revenue, we need to figure out how the underlying technology driving this revenue will progress. For over half a century, the growth of the semiconductor industry was determined by Moore’s law. Moore determined that the number of transistors on a microchip would double every two years, driven by the need for increasing computing power.
Technological advancements and the race for increasing computing power mean Moore’s law is not relevant anymore. We can way more than double the transistor count in two years now. But the driver behind Moore’s law, the ever-increasing need for greater computing power, is today more relevant than ever. Meta Platforms CEO Mark Zuckerburg showed why. His company released the Llama 3 model in April 2024. The next version of the model, the Llama 4, is set for launch early this year. Even though the two models are only less than a year apart, the computation power required to progress from one model to the next is 10 times greater!
The major tech companies in the US continue to add capacity to cater to this increasing computing power requirement. Their reasoning is simple: they need to develop the tech before someone else does. A headstart in AI can make a ton of difference. Meta invested $8.5 billion in the second quarter of last year when they released the Llama 3 model. This spending was 33% higher than the same period in the prior year. Scale that to other tech companies and you can see why Nvidia continues to be a big beneficiary of the AI race.
At a 90% market share, Nvidia is the company that will provide 10x computing power to all these tech companies (and later much more). None of them can afford to slow down as it will give the competitors a massive advantage. If they don’t spend the money, they lose the AI race. Simple as that.
Nvidia is 5th on our latest list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 193 hedge fund portfolios held NVDA at the end of the third quarter which was 179 in the previous quarter. While we acknowledge the potential of NVDA as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.