The artificial intelligence (AI) industry, which automates tasks traditionally performed by humans through software and systems, has seen a significant boom in 2023. As investors' primary focus, the sector's success is largely attributed to machine learning, with applications spanning various industries. According to PwC, AI could contribute an additional $15.7 trillion to the economy by 2030, including $6.6 trillion from increased productivity and a $9.1 trillion boost in consumption.
Nvidia (NASDAQ:NVDA), a graphics processing unit (GPU) specialist, has made significant strides amidst this AI surge. As the fiscal year 2024 began for Nvidia in early February, Wall Street anticipated high-single-digit sales growth for the company. However, after two quarters, analysts now predict a 103% sales increase in 2024, raising sales estimates from just under $30 billion to nearly $55 billion within seven months.
The majority of this growth is attributed to revenue from data centers. Nvidia's A100 and H100 GPUs have gained dominance in high-compute data centers, making Nvidia a critical infrastructure component of the AI revolution. Nevertheless, Nvidia might face challenges in 2024 due to potential expansion in AI GPU production.
Nvidia's data center sales have soared primarily due to the maxed-out production of its A100 and H100 GPUs. The shortage of AI-accelerated GPUs and significant pricing power have collectively propelled Nvidia's gross margin higher. Taiwan Semiconductor Manufacturing Company (TSMC), whose chip-on-wafer on substrate (CoWoS) capacity is currently at its limit, plays a pivotal role here. TSMC is expected to double its CoWoS capacity soon, aiming to increase from 8,000 wafers per month to 11,000 by year's end, and further to between 14,500 and 16,600 by the end of 2024.
However, as Nvidia expands production to meet customer needs, it will face higher costs. As its A100 and H100 GPUs become less scarce, Nvidia's pricing power will likely decrease, impacting its gross profit margin. This margin jumped to 68.2% during the first half of fiscal 2024 from 55.7% in the comparable period in fiscal 2023 but could decline as production increases.
Competition in the sector is also set to intensify. In June, Advanced Micro Devices (NASDAQ:AMD) introduced the MI300X, its most advanced GPU for AI-accelerated data centers. While AMD plans to ramp up sales in 2024, Intel (NASDAQ:INTC) also plans to release its Falcon Shores GPU in 2025 to compete directly with Nvidia in high-compute data centers.
Furthermore, history suggests that after a period of euphoria, next-big-thing investments often fail to meet investors' high expectations initially. This pattern has been observed with innovations such as internet advent, business-to-business commerce, genome decoding, cancer immunotherapies, 3D printing, cannabis, blockchain technology, and the metaverse. Despite high expectations from investors for Nvidia's performance based on its valuation, the company's path may not be as smooth as anticipated.
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