The Nvidia Paradox: Skyrocketing Now, But for How Long?

Nvidia (NASDAQ:NVDA) dominates the artificial intelligence industry and, as a result, all coverage of it. This is perhaps the key fact that keeps NVDA stock holders interested.

Nvidia chips and software are seen as vital for creating Large Language Models (LLMs) and calculating outputs from them.

This has given Nvidia a $2 trillion market cap and, just as important, enormous power over the industry. Investors know it, analysts know it, and so do vendors.

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That’s because there are a limited number of Nvidia chips being made, against unlimited demand. There are winners here, and there are losers, too.

Lessons from Dell and HPE

Dell (NASDAQ:DELL) and Hewlett Packard Enterprise (NYSE:HPE) both make networked servers. Both talk about their collaboration with NVDA stock.

But only one company is getting the better of that cooperation, and that’s Dell. Since the end of August, HPE stock is down 10% while Dell stock is up 123%. HPE earnings are falling while Dell earnings are rising.

The obvious reason is HPE’s inability to deliver the premium Nvidia servers that customers are demanding. Investors who bought the “value stock” of HPE, with a dividend yield of 3.34%, were caught offside.

Knowing where Nvidia chips are going can tell you where profit is going, too.

Fighting the Trap

Amazon NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and even Microsoft (NASDAQ:MSFT) are fighting this trap by building custom chips, and software. This might give them back some control over their destiny lost in the Nvidia tsunami.

But accepting fate is proving a better short-term strategy. Meta Platforms (NASDAQ:META) is the one Cloud Czar that has stopped its custom chip development, accepting Nvidia’s terms and conditions. This has made Meta the big winner among the Cloud Czars. Its shares are up 42% year to date. That’s more than double Amazon’s gain of 17%, nearly four times Microsoft’s gain of 10.5%. Google is down 2%.

It’s good to be the King. The King has choices. NVDA stock can distribute its chips based on price or based on the strength of the customer relationship. It can also keep the chips itself, building its own cloud. The Nvidia DGX Cloud won’t be as big as those of the Czars, but it can skim cream from the market. When Nvidia is selling your company DGX Cloud as a service, you get the entire Nvidia stack, hardware, and software. It’s a premium service that can command a premium price.

How Long Does This Last?

Nothing like this can last forever. That’s something investors need to realize.

Amazon, Google, and Microsoft are putting billions of dollars into workarounds for Nvidia’s market dominance. This is boosting Nvidia’s rival Advanced Micro Devices (NASDAQ:AMD), whose stock has been on fire recently, up 42% in 2024.

Nvidia and the AI gold rush are a rising tide that is lifting a lot of boats. Not all of them, but a lot of them.

There is an end date coming for all this. It can come when the Cloud Czar workarounds start working. It can come when some AI applications fail to earn a profit.

The Bottom Line

When Nvidia stock does fall, it will fall hard, and it will fall fast. That’s because it now sells for an extreme valuation.

The fall is not happening today. The realization that it will happen one day is helping the stock’s rise.

So is its strategy to maximize profits in distributing its chips and building out its own cloud.

It’s also important to remember the degree to which this is a software story. Hardware is software. The money is in the design, written in software. Nvidia is also a software company, whose AI development tools, like CUDA, help maintain its market dominance.

Just keep reading the market’s tea leaves, don’t go all-in, and be ready to pull the plug. Hang in there.

As of this writing, Dana Blankenhorn had a LONG position in MSFT, AMZN, GOOGL and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

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