nvidia ai

After falling almost 50% in 2022, Nvidia (NYSE: NVDA) stock is up around 75% in 2023 and is the best-performing S&P 500 stock, at least in part due to its AI initiatives.

The stock is outperforming the wider markets by a wide margin as the S&P 500 is up barely 4% in 2023. While US stocks jumped in January, they have since come down on inflation fears and more recently the regional banking crisis.

After the splendid rally even the brokerages that were not so bullish on Nvidia have changed their position and today Morgan Stanley upgraded the stock from equal weight to overweight while raising the target price from $255 to $304.

In his note, Morgan Stanley analyst Joseph Moore said, “Having been EW for a large move in the stock, we still see indications that [large language model] enthusiasm is turning into stronger spending both near term and long term; we have been too data point oriented around a positive bigger picture, but the narrative is too strong to remain on sidelines.”

Notably, AI has been the latest battlefront for tech giants and companies like Baidu and Google have come up with their own chatbots to take on ChatGPT.

However, both Baidu’s Ernie and Google’s Bard had a disappointing debut and in Google’s case, Alphabet lost $100 billion in market cap as Bard provided incorrect information in a promotional video.

Nonetheless, while tech giants have tightened their belts and have scaled back investments in some areas, their purse strings are still wide open when it comes to AI.

In January, Microsoft announced a multi-billion dollar investment into ChatGPT’s parent company OpenAI, barely days after laying of 5% of its workforce.

Nvidia Sees AI as a Key Growth Driver

Coming back to Nvidia, the company sees AI, metaverse, and autonomous driving as key long-term growth drivers. Nvidia reported revenues of $6.05 billion in the fiscal fourth quarter of 2023. While its sales fell 21% YoY, they were nonetheless higher than the $6.0 billion that analysts were expecting.

Nvidia’s Gaming revenues fell 46% YoY to $1.83 billion however the Data Center segment which also sells AI chips reported an 11% YoY rise in revenues. In the full fiscal year, its Data Center revenues rose 41% to a new record high.

In his prepared remarks, Nvidia’s CEO Jensen Huang said, “AI is at an inflection point, setting up for broad adoption reaching into every industry.”

He added, “From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI.”

Morgan Stanley on NVDA’s Valuation

Meanwhile, even as Morgan Stanley upgraded Nvidia stock, it sounded apprehensive about the stock’s valuation.

In his note, Moore said, “NVIDIA valuation is high, but not dramatically out of line with peers; and at the limit ,high investment in NVIDIA products is even bad for the rest of compute, as budget compression is met with high AI spending requirements.”

Meanwhile, Moore acknowledged that he still finds Nvidia stock attractive on a relative basis.

Nvidia believes that it is well-placed to capitalize on the AI opportunity. During the fiscal Q4 earnings call, Huang said, “We are set to help customers take advantage of breakthroughs in generative AI and large language models. Our new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production.”

Nvidia would provide more information about the AI capabilities at its upcoming GTC developer conference which is scheduled for March 23-24.

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