Nvidia (NASDAQ: NVDA), along with many other growth stocks, had a rough start to the year. Investors worried about the war in Iran and potential weakness in the U.S. economy, and this hurt their appetite for stocks that generally require booming markets to thrive.
And another element made the situation even worse for companies in the artificial intelligence (AI) industry, such as Nvidia. Questions circulated about whether the AI revenue opportunity really was as massive as initially thought, especially considering the level of spending in this area. And seeing the high valuations of many AI stocks, some investors decided to sell and shift into other industries.
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So, after leading stock market gains in recent years, AI stocks in the first quarter of this year actually led declines. All of these elements created significant turbulence.
Though the S&P 500 has rebounded this month and has even reached a new high, and Nvidia too is on the rise, investors are still digesting the recent turmoil. And that means now is an excellent time to consider one question: How resilient is Nvidia’s business? Let’s find out.
First, let’s consider Nvidia’s path to AI dominance and explosive earnings growth. The company, which has been around for more than 30 years, in its earlier days focused on developing graphics processing units (GPUs) for the video gaming industry. But as it became clear that GPUs could be game changers across a variety of areas, Nvidia created a parallel computing platform to expand their use. And when Nvidia chief Jensen Huang recognized the potential of GPUs in AI, he decided to go all in on that area — about a decade ago, Huang focused on developing GPUs specifically for AI.
Nvidia entered the GPU for AI market first, and the company’s commitment to innovation has kept it in the lead ever since. Today, video gaming represents only a small portion of revenue, while data center accounts for 91% — so it’s fair to say that Nvidia is extremely dependent on AI for growth. And that’s why questions about potential AI spending contributed to the stock’s weakness in recent times.
Now, let’s consider whether this company, which is so heavily reliant on AI, is in fact resilient.
As mentioned, Nvidia’s business right now revolves around the AI market. In the earliest days of the AI boom, this meant powering the training of AI models, but this has evolved to include much more. Today, these trained models still need compute to inference, or go through the actual thinking process to solve problems — for this, they rely on GPUs.
