Nvidia Stock Could Increase as Musk Plans $9 Billion AI Chip Purchase

Nvidia stock may experience an uptick as Elon Musk sets his sights on acquiring $9 billion worth of AI chips.

This potential investment underscores the growing demand for advanced AI technologies and could further boost Nvidia's position in the market. Investors are watching closely for the impact this deal might have on Nvidia's share performance and overall growth in the AI sector.

Nvidia's Stock: Will It Continue to Exceed Expectations?

Stock prices typically rise when companies surpass investor expectations and increase their guidance, while they tend to fall if they miss either mark. Nvidia is no exception to this trend.

To justify investing in Nvidia, now the world's most valuable company with a market capitalization of $3.5 trillion and a remarkable 195% increase in share price this year, one must believe that the company will continue to exceed expectations and raise its forecasts.

If Nvidia significantly outperforms conservative growth targets, aided by Blackwell, its stock could still see gains despite challenges such as slowing revenue growth, reliance on a few major customers, and the lack of a groundbreaking application to generate returns on the substantial investments required to train and operate AI chatbots.

Reasons Nvidia Stock Could Decline

Investors face several significant risks with Nvidia stock, including:

Slowing Revenue Growth: Nvidia experienced revenue growth rates between 206% and 265% during Q4 2023, Q1 2024, and Q2 2024. Although the company reported a 94% increase in revenue for the third quarter—still impressive—it marks a notable slowdown compared to earlier quarters. The forecast of 70% growth for Q4 suggests a continued deceleration, as noted in my November Forbes article.

Dependence on a Few Large Customers: Nvidia relies heavily on a small number of key accounts, each contributing over 10% to total revenue, as reported by Social Press Blog. In the first nine months of 2024, these major clients purchased between $10 billion and $11 billion worth of goods and services from Nvidia. Potential customers include Microsoft, Meta Platforms, and SuperMicro, according to Mandeep Singh of Bloomberg Intelligence. If Singh's analysis is accurate, delays in SuperMicro’s financial reporting could pose risks for Nvidia investors.

Increasing Investment in Generative AI: The costs associated with building generative AI—covering data centers, chips, software, electricity, and water—could surpass $1 trillion by 2030, according to Goldman Sachs. The energy and water consumption of AI data centers is expected to rise from 3% to 4% of the nation’s total in 2024 to between 11% and 12% by 2030, as reported by the Wall Street Journal. Without corresponding revenue growth or reduced costs, companies may reduce spending, adversely affecting Nvidia's growth prospects.

Lack of a High-ROI Generative AI Application: A transformative application for generative AI that delivers high returns on investment remains absent. Many users currently employ generative AI tools to assist with minor tasks, such as overcoming writer’s block. While a few companies integrate AI to enhance business processes like sales and customer service, the search for impactful generative AI applications that drive significant growth is ongoing. If a breakthrough application does not materialize, companies may scale back their investments in generative AI, negatively impacting Nvidia’s growth trajectory.

Reasons Nvidia Stock Could Continue to Rise

It seems that investors are already factoring in many of the potential negatives surrounding Nvidia. Despite the company’s slowing growth in 2024, its stock has continued to climb. This could be attributed to Nvidia’s effective management of investor expectations regarding growth.

Positive surprises in growth could further propel Nvidia’s stock upwards. Significant orders for the company’s latest chip lineup from major AI service providers, combined with increasing corporate interest in leveraging AI to enhance operational efficiency, could deliver unexpected good news to investors. Here’s how:

Significant Blackwell Orders Expected
Nvidia anticipates generating $13 billion in revenue from Blackwell chips in Q4 2024. These chips are not only faster but also more energy-efficient than the company’s previous high-end models, boasting about 25 times the energy efficiency and 30 times the processing speed, according to reports.

Expansion of Nvidia Superclusters
Major AI service providers are investing billions in building superclusters of computer servers that incorporate unprecedented numbers of Nvidia's advanced chips. For instance, Elon Musk's xAI constructed the Colossus supercomputer in Memphis, utilizing 100,000 Nvidia Hopper AI chips. By next summer, xAI plans to expand its supercluster to include 300,000 Blackwell chips. With Blackwell chips priced at $30,000 each, Musk's planned $9 billion investment could create significant upside potential for Nvidia investors.

Increased CEO Discussions on Generative AI Applications

In Q3 2024, there was a notable increase in CEO discussions regarding the use of AI and automation to optimize processes, as reported by IOT Analytics. Key AI applications mentioned included process automation (up 59% since Q2), digital twins (up 35%), and conversational AI (up 28.6%). While the impact of these discussions on actual growth remains to be seen, they could pave the way for breakthrough AI applications that would benefit Nvidia significantly.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.