Elon Musk Just Gave Nvidia Investors 100,000 Reasons to Cheer

Elon Musk Just Gave Nvidia Investors 100,000 Reasons to Cheer

Over the past year, serial entrepreneur Elon Musk and semiconductor company Nvidia (NASDAQ:NVDA) have become staples of financial headlines. However, the two names have rarely been mentioned together – until now.

Just a few days ago, Musk’s artificial intelligence (AI) startup called xAI, closed a $6 billion funding round. xAI is building a large language model (LLM) called Grok that aims to compete with OpenAI’s ChatGPT.

Following the announcement, several media outlets reported that part of the funding would be used to purchase 100,000 Nvidia H100 graphics processing units (GPUs) to build a supercomputer.

Let’s dig into this story a little more and find out why it’s such good news for Nvidia investors.

What does xAI do?

There are a number of LLMs on the market today. Besides ChatGPT, some of the best-known models include Llama from MetaplatformsClaude de Amazonand the Gemini of Alphabet.

These generative AI models are able to answer prompt-based questions, analyze images, and even evaluate relevant information contained in documents. Additionally, big tech is deliberately making efforts to incorporate generative AI into their various products, including social media, e-commerce, cloud computing, cybersecurity, and more.

In a way, LLMs are already becoming a bit commoditized. It is difficult to find major differences between the competition, and the introduction of another LLM model only floods the landscape.

xAI’s mission is to “understand the true nature of the universe”. At first glance, this seems like an overly philosophical and ambitious goal. However, as is often the case with Musk, there is an ironic reference to xAI’s mission: namely, it’s a nod to the famous science fiction novel The Hitchhiker’s Guide to the Galaxy.

Elon Musk Just Gave Nvidia Investors 100,000 Reasons to Cheer

Image source: Getty Images.

How big is this opportunity for Nvidia?

Musk has great respect for Nvidia. You’re hereone of his other companies, is currently using supercomputers powered by Nvidia H100 chips to form self-driving software for its cars.

It’s important to understand that demand for Nvidia’s chips is so high that the company has faced some supply constraints over the last year. The disparity between limited supply and high demand has caused Nvidia’s chip prices to rise.

Although exact prices vary, it is estimated that Nvidia H100 GPUs can fetch over $40,000 per chip. Using this as an approximation, xAI’s planned purchase of 100,000 chips would equate to $4 billion.

I wouldn’t get too bogged down in the smallest details. The main idea here is that Musk continues to choose Nvidia to power the most important products for his companies. I see this as a major source of validation. Additionally, Nvidia’s rollout of Musk’s high-profile startup only adds to its existing and growing footprint on the competition.

Should Investors Buy Nvidia Stock Right Now?

The development around xAI doesn’t inherently make Nvidia stock a buy. As is the case with breaking news and its influence, Nvidia shares jumped nearly 8% in the day following the xAI story.

Instead of focusing on a single new positive narrative, I would encourage investors to take a step back and look at the bigger picture. Over the past year, Nvidia’s revenue has soared, but more importantly, the company has grown profitably.

NVDA Net Income Chart (TTM)NVDA Net Income Chart (TTM)

NVDA Net Income Chart (TTM)

The chart above shows that Nvidia’s gross profit increased by just under 200% over the last 12 months. Furthermore, during this same period, the company’s net income tripled. You would think that Nvidia’s stock price has kept up with these growth rates in lockstep, but that’s not the case.

Over the past year, Nvidia shares are up 189% as of this article’s publication. As the chart below shows, Nvidia’s current price-to-earnings (P/E) multiple is actually significantly lower More than a year ago.

NVDA PE Ratio ChartNVDA PE Ratio Chart

NVDA PE Ratio Chart

In other words, Nvidia’s profits are accelerating faster than the stock price. While a P/E of 66 isn’t exactly cheap, the trends in the chart above suggest that Nvidia is more reasonably valued today than it was just a year ago.

I see the relationship with xAI as a piece of a big puzzle. Namely, the secular tailwinds fueling AI are very real, and for now, Nvidia is leading the pack compared to other chipmakers.

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Suzanne Frey, an executive at Alphabet, 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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions in Alphabet, Amazon, Meta Platforms, Nvidia and Tesla. The Motley Fool holds positions and recommends Alphabet, Amazon, Meta Platforms, Nvidia and Tesla. The Motley Fool has a disclosure policy.

Elon Musk Just Gave Nvidia Investors 100,000 Reasons to Rejoice was originally published by The Motley Fool

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