- I estimate the ChatGPT revenue opportunity for Nvidia to be approximately $5 billion.
- OpenAI and Microsoft’s partnership means that OpenAI will use Nvidia’s H100 GPU, which is 2.6x faster than its predecessor, the A100 GPU.
- Nvidia has improving opportunities in the auto market as evidenced from its partnership with both Mercedes Benz and Foxconn.
- Outside of ChatGPT, there are huge AI opportunities for Nvidia to capture in the long term with low penetration rates and AI is at an inflection point.
- My 1-year target price is $230, representing 30% upside from current levels.
Nvidia is in The Watchlist Portfolio in Outperforming the Market
I think that Nvidia (NASDAQ:NVDA) as an investment opportunity has legs to run for the next five years. This article will go deeper into where I think Nvidia will be five years from now.
I will summarize my short-term and longer-term investment thesis for Nvidia below.
In the short-term, Nvidia was hit particularly hard by the cyclicality of the semiconductor sector as a result of the weakness of the gaming segment and slowdown in growth in the data center segment. That said, I think that the short-term trends are bottoming as the gaming segment is showing signs of recovery with leading indicators showing the segment could see reaccelerated growth in 2023 as a result of more favorable inventory levels downstream. For the data center segment, the entire sector is seeing a slowdown and I believe that Nvidia’s data center offering remains solid, and growth will ensue as customer spending on data center remains solid and the new product cycle ramps.
For the long-term, I think that Nvidia’s current risk/reward looks attractive. It has long-term secular growth drivers like artificial intelligence (“AI”), new software opportunities like auto as well as metaverse opportunities. The company is currently beaten down due to the effects of a downcycle, but I believe that Nvidia remains well positioned, not just for the upcycle, but for the next five years. Nvidia’s strong competitive position and product road map continues to bring strong growth and demand drivers for the company.
I have written prior articles about Nvidia’s contrarian opportunity that can be found here.
The rise of ChatGPT
If you have not heard of Open AI’s ChatGPT, this is probably one of the things that took the world by storm in 2022 and one of the most exciting innovations seen in the past few years.
Open AI launched ChatGPT in November of 2022. ChatGPT is able to interact with users in a conversational manner, with the dialogue format meant to allow for further questions, admitting of mistakes and rejecting of users’ requests if inappropriate. Chat GPT was constructed using Open AI’s GPT-3 family of large language models. It was also finetuned with both supervised and reinforcement learning techniques.
Nvidia’s ChatGPT revenue opportunity
To determine the sales opportunity that could be generated from the ChatGPT opportunity, we first need to determine the volume of words generated each year by ChatGPT and the revenue that Nvidia earns for each generated word.
First, for the annual volume of words generated, we need to assume what applications ChatGPT will be used for in the future, for businesses or individuals. I think that ChatGPT could be used as a free AI application to power Microsoft’s Bing search engine, or even as a paid application that is only limited to Microsoft 365. It could be either of these two use cases, both of these two use cases or even more applications that I have not included here. As a result, I assume a base case of 100 million users for the base case, 50 million users for the bear case and 200 million users for the bull case. Assuming that each user generates six queries on average daily, and each query will receive a 100-word response, I derived about 20,700 billion words generated each year.
In terms of the revenue from each word generated, I assume that the cost for each word generated is $0.00025, based on an assumption for Azure AI/ML cloud API compute hour and the 2.18 words per second rate for an A100 GPU running ChatGPT.
OpenAI and Nvidia
I think that Nvidia remains a key partner for developing new AI technologies as a result of its lead in the data center AI hardware and software market. This is a result of continued innovation and improved performance, with Nvidia’s H100 GPU is 2.6x faster than its predecessor, the A100 GPU.
Nvidia currently has a multi-year collaboration with Microsoft (MSFT), where the two companies will develop one of the most powerful AI supercomputers globally. This AI supercomputer will be powered using Azure’s advanced supercomputing infrastructure and Nvidia’s GPU, networking and full stack of AI software. This AI supercomputer is expected to help companies around the world to train, deploy and scale AI and large models.
OpenAI has a multi-year partnership with Microsoft, which includes an investment from Microsoft of $1 billion into OpenAI. This partnership with Microsoft is meant to help OpenAI develop a platform to bring forth new technologies in artificial intelligence. Through this OpenAI and Microsoft partnership, to train and run ChatGPT, OpenAI uses Nvidia’s A100 GPUs.
The AI opportunity beyond ChatGPT
ChatGPT was mentioned by Nvidia’s management as a 2- to 3-year-old technology that moves from perception to generate as the next version emerges. ChatGPT is now a major inflection point as management believes that the AI total addressable market is now larger than what they perceived it to be one year prior. Before the launch of ChatGPT by OpenAI, Microsoft was not a large consumer of GPU as they did not have internal services requiring AI capabilities.
Currently, I think that AI is still at very low penetration and adoption rates and the room to grow continues to be immense as more industries adopt it and use it to generate content. I think that it is inevitable that every industry will want to build large AI language models to benefit their own companies, leveraging the use of AI to bring large benefits to performance and costs.
It is inevitable that the AI conversation with Nvidia goes beyond OpenAI. The company is working with many others outside of OpenAI for new industrial domains. Every AI application will now have a generative back end, and this will open a huge inference opportunity for Nvidia. At the end of the day, I think that Nvidia’s competitive advantage in AI remains to be utilization, utility and throughput.
Nvidia’s auto opportunities
Nvidia recently announced an auto partnership with Mercedes Benz (OTCPK:MBGAF) to develop its vehicles based on the Nvidia Drive Orin centralized compute, as well as have intelligent driving abilities tested in the Nvidia Drive Sim platform powered by the Omniverse. The Nvidia Drive Orin is targeted for intelligent vehicles, ideally powering vehicles needing autonomous driving, artificial intelligence cockpit capabilities.
This signals Mercedes Benz shift towards incorporating artificial intelligence and utilizing metaverse technologies to improve the development process and manufacturing of the company.
Using Nvidia’s Omniverse platform to design and plan its manufacturing and assembly plants, Mercedes Benz intends to bring the digitalization of its production process to the next level. The use of Nvidia’s Omniverse platform allows Mercedes Benz to construct and operate digital twins of the factories that they intend to build, and can review, optimize and implement them with higher efficiency, reduce waste and improve costs. By using Nvidia Omniverse to plan production, Mercedes Benz will be not just making their vehicles intelligent, but their entire production process intelligent as well.
In addition, Nvidia is partnering with Foxconn (OTCPK:FXCOF) to build automated and autonomous vehicle platforms. Foxconn will produce electronic control units based on Nvidia Drive Orin as a tier one manufacturer for the global automotive market. Electric vehicles manufactured by Foxconn will have the Drive Orin electronic control units and Drive Hyperion sensors, which will enable these vehicles to have automated driving capabilities. Nvidia’s Drive Orin system-on-a-chip has the ability to handle a large number of applications as well as deep neural networks running at the same time, especially useful for autonomous vehicles, while Nvidia’s Drive Hyperion is a modular development platform used to design autonomous vehicles. With these two in a vehicle, they act as the vehicle’s brain and central nervous system so that autonomous vehicles can become a reality.
For Nvidia, this Foxconn partnership will help it scale up demand for its Drive Orin, while helping Nvidia have a faster time-to-market for its Drive Hyperion. Through Nvidia’s partnership with Foxconn, it brings global OEMs looking for intelligent and autonomous driving solutions to Foxconn, which can help scale up Nvidia’s Drive Orin and Drive Hyperion. On the other hand, Foxconn benefits from the technology that Nvidia brings to the table, with vehicles that are highly automated, innovative and energy efficiency.
When I think of Nvidia for a 5-year investment horizon, Nvidia looks well positioned to continue to grow given its leadership position, strong competitive advantages and continued growth tailwinds through untapped demand pools.
For my valuation of Nvidia, I used an equal weight of DCF method and the P/E multiple method. As Nvidia has a 10-year average P/E multiple of 35x, I assumed its 2024 P/E to be 35x, while assuming a 10% discount rate and 25x terminal multiple for my DCF model. My 1-year target price is $230, representing 30% upside from current levels.
I continue to think that Nvidia is in a strong competitive position, but with its leadership position and market share, there are risks involved. Competitors with large financial resources may compete with Nvidia in the long-term, including players like AMD (AMD) and Intel (INTC).
There are risks that the gaming segment may take longer to recover, although there are signs that the gaming segment inventory situation is improving. if the consumer sentiment and macro backdrop remain weak, this could bring weakness to the gaming recovery and bring downside risks to my estimates.
If we see the macroeconomic environment worsen, this will lower the demand for PC gaming. As a result of Nvidia’s significant exposure to the PC gaming segment, the company is particularly affected by the weakening of the macroeconomic environment. Also, we might see further weakness in the data center segment if the economic conditions remain weak or worsens further.
I think that we need to look beyond the short-term for Nvidia and have a long-term view. The short-term headwinds from the gaming and data center segment will be seen as an opportunity for investors to take advantage of the poor sentiment to add to Nvidia.
For the next five years, I think that Nvidia’s opportunity set will continue to grow, even as it already has long-term secular growth drivers like AI, new software opportunities and metaverse opportunities. Along with its current strong competition position and product road map, Nvidia is well positioned to take advantage of opportunities that emerge in the next five years. My 1-year target price is $230, representing 30% upside from current levels.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Disclosure: I/we have a beneficial long position in the shares of NVDA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Outperforming the Market aims to help you outperform the S&P 500’s 10% average annual returns while having downside protection during volatile markets.
The Barbell Portfolio consists of high conviction growth and value stocks that can outperform the market in the long-term.
We do bottom-up fundamental research analysis on companies with a focus on valuation, typically buying companies at 30% – 50% discount to intrinsic value.
It will include:
The Barbell Portfolio
The Watchlist Portfolio
The Price Target Report
New Stock Ideas
Earnings Report Analysis
Join us for a 2-week free trial to get access to The Barbell Portfolio today!