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There’s an AI war, and Nvidia is the only arms dealer: Analyst

Shares of Nvidia (NVDA) rocketed more than 26% on Thursday, as the graphics chip maker rides the generative AI explosion. The rip higher comes after the company reported better-than-expected first-quarter earnings Wednesday, and pointed to a dramatic acceleration in data center revenue in the current quarter.

Nvidia is the leading AI chip maker thanks to years of investments in AI technologies. And according to Raymond James managing director Srini Pajjuri, the company isn’t going to lose that title anytime soon.

“There’s only one supplier of GPUs, and Nvidia has been investing in this market for the last 10 years. They not only have the chips, they have the systems, the software, it’s a full stack solutions company,” explained Pajjuri.

“In the short term, Nvidia is the only game in town,” he said.

Nvidia beat analysts’ expectations on the top and bottom line in Q1 thanks to its data center business, which brought in $4.2 billion in revenue versus the $3.9 billion Wall Street was anticipating. That was better than the same quarter last year when the company reported data center revenue of $3.8 billion.

Nvidia’s gaming business, meanwhile, continues to deal with a COVID hangover, as consumers continue to pull back on spending on PCs and graphics cards after buying them up during the pandemic.

The segment brought in $2.2 billion, which was better than the $1.9 billion Wall Street expected, but lower than the $3.6 billion the company reported in Q1 last year.

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But it’s Nvidia’s projections for the second quarter that have caught Wall Street’s attention. The company says it expects revenue of $11 billion, plus or minus 2%. Wall Street was looking for $7.2 billion.

“We thought if they beat the guidance by about 5%, that’s good enough for the stock to stay where it is. But they’re beating [the] guidance consensus by 50%,” Pajjuri said.

“There’s a war going on out there in AI, and Nvidia today is the only arms dealer out there. So as a result we’re seeing this huge jump in revenues,” he explained.

Baird Equity Research senior research analyst Tristan Gerra echoed those sentiments in an investor note Thursday saying while platforms like Google’s (GOOG, GOOGL) next-generation tensor processing unit could be competitive, it is unlikely to take market share from Nvidia.

The logo of NVIDIA as seen at its corporate headquarters in Santa Clara, California, in May of 2022. Courtesy NVIDIA/Handout via REUTERS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY.  MANDATORY CREDIT
Nvidia reported better than expected Q1 earnings on Wednesday. Courtesy NVIDIA/Handout via REUTERS

“We see nobody with a full-stack solution remotely matching Nvidia’s capabilities,” Gerra wrote.

But the AI gold rush won’t last forever for Nvidia. According to Pajjuri, long-time Nvidia rival AMD (AMD) could eventually begin to capture market share. Companies designing their own custom chips could also put the kibosh on Nvidia’s party.

“Nvidia’s chips today sell for $25,000 a piece,” he said. “By designing the chips in house, you can reduce the cost pretty significantly.”

The current explosion in AI kicked off when OpenAI released its generative AI chatbot ChatGPT last year. Since then Microsoft and Google have jumped into the arena with search engines, bots, and more running powered by generative AI.

The category’s unprecedented growth has also drawn the attention of lawmakers who are looking at ways of potentially regulating the technology.

Daniel Howley is the tech editor at Yahoo Finance. He's been covering the tech industry since 2011. Follow him @DanielHowley

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