After its recent earnings announcement, NVIDIA (NASDAQ: NVDA) saw its shares skyrocket, thanks to its recent wins and projected growth in datacenter/Artificial Intelligence-enabling technologies. As great as the early wins from AI platforms has been, they have also exposed some key shortcomings in the technology.
In particular, AI systems tend to be incredibly strong at solving problems that they’re specifically trained for, as long as the data they encounter does not stray too far from the data they’re initially trained on. As we learned last year when an amateur used a strategy that AlphaGo hadn’t seen in its training to beat that world-champion AI at the game of GO , these brilliant systems can fail in remarkably simple ways.
As AI researchers and developers look to solve those issues, one key tactic they’re taking involves using more hardware to build bigger models and retrain existing ones over time. It’s within that context that NVIDIA’s earnings release and projections look so promising. As a major hardware provider to the Artificial Intelligence industry, NVIDIA is trying to set itself up to be the “picks and shovels” provider to that industry.
Why that designation matters
During the California gold rush of the 1840s and 1850s, the people who made money most reliably weren’t the gold prospectors, they were the suppliers of those prospectors. The people who sold the clothing, supplies, and equipment to the people searching for gold were able to make significant amounts of cash, while those who were searching for gold were more hit-or-miss with their successes.
The lesson that investors learned from that experience is that a well-managed support business that those chasing the hottest trends are relying on may be the best investments to come from that trend. That’s why NVIDIA, with its AI / Data center infrastructure focus, saw its shares spike so high when it announced its expected growth in that segment.
Boom and bust, and perhaps boom again
Of course, investors who missed that initial run up have a decent reason to be skeptical and cautious when it comes to investing now. While there’s no denying the potential that AI can have to transform several industries, it wasn’t that long ago that NVIDIA itself looked to be a winner from another set of trends.
During the work-from-home surge thanks to the COVID pandemic, people often updated their personal computers, frequently with NVIDIA graphics cards, to help them be more productive. Around the same time, a boom in cryptocurrency mining led people to buy more NVIDIA graphics cards to accelerate their mining computers.
That particular boom lasted until Ethereum -- the second most popular cryptocurrency -- shifted from proof of work to proof of stake, cutting down its demand for NVIDIA’s cards. That shift, along with a general collapse in cryptocurrency prices, drove a decline in NVIDIA’s stock just before the current AI boom renewed hope in its future.
Recognize the cyclical nature of this industry, and invest accordingly
This history of boom and bust is nothing new for NVIDIA. Indeed, the company’s CEO has acknowledged that it has been close to bankruptcy a few times in its history, thanks in large part to the fickle and cyclical nature of its industry.
While NVIDIA is benefittting from a large build out in infrastructure now as AI heats up, there are two key questions to consider:
- How long will that build out last?
- Where will NVIDIA’s next huge revenue driving idea come from?
Potential investors considering a position in the company’s shares should keep those questions, along with the boom-and-bust reality of the business, in mind when modeling out NVIDIA’s potential future. That way, those investors can be prepared when the next downturn comes and reduce their risk of getting spooked into a position of buying high and selling low from that inevitable ‘surprise.’
At the time of publication, Chuck Saletta did not own shares of NVIDIA.
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Sources – EasyResearch, CNBC, Yahoo Finance, NPR, Technology Review, Windows Central, The Guardian, Medium.com, Investopedia, nvidia Corp.
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