Nvidia Built an AI Chip Empire. But It’s This Other Creation That Makes the Stock a Screaming Buy Today.

Key Points

• Nvidia’s revenue has soared in the double digits in recent quarters due to its leadership in AI chips.

• The company got in early on the market and updates technology often to stay ahead of rivals.

• 10 stocks we like better than Nvidia ›

Nvidia (NASDAQ: NVDA) is known for its artificial intelligence (AI) chips. These graphics processing units (GPUs) power some of the most critical tasks in the field, from training large language models to putting them to work. And this has helped the tech giant increase its revenue to mind-boggling levels: In the latest quarter, revenue surged 73% to $68 billion, and analysts expect the pace to continue. Forecasts for the current quarter call for a 77% increase in revenue.

Of course, Nvidia isn’t alone in the chip market. It faces rivals such as fellow chip designer Advanced Micro Devices — and even some of Nvidia’s customers, like Amazon, have developed AI chips. But these competitors haven’t matched the performance of Nvidia’s latest GPUs. And in an area where speed and efficiency count, customers continue to rush to the player offering this top performance — that player continues to be Nvidia.

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Though Nvidia has built an empire thanks to the GPU, the company has constructed a solid competitive advantage thanks to another related technology. In investing, identifying a competitive advantage, or moat, is crucial, as this one element may keep a company at the head of the pack.

Let’s check out this one particular creation that makes Nvidia stock a screaming buy today, ahead of the next phases of AI growth.

Image source: Getty Images.

Nvidia’s gaming strengths

Before we discuss this major innovation, it’s important to consider Nvidia’s early days. The company, founded more than 30 years ago, focused on serving the video gaming market with its GPUs. These chips power the visuals in gaming, a key part of the experience as images and video bring the game to life for users.

The company still is a leading seller of chips to this market, but about a decade ago, Nvidia chief Jensen Huang spotted a new opportunity: AI. He decided to favor developing GPUs specifically to serve this market. It was a big bet, since at the time, the idea of actually applying AI to real-world situations was farther off — and it wasn’t a sure thing.

This bet, however, clearly was a wise one as we can see today through Nvidia’s earnings figures and through the actual use of AI across industries. Companies like Amazon are using the technology to gain efficiencies in fulfillment centers and help customers shop on the e-commerce site. And we can see AI in action at healthcare giant Johnson & Johnson, which uses it in diagnostics and drug discovery.

From gaming to AI

Now let’s consider the competitive advantage that allowed Nvidia to build such dominance — and that should keep the leadership going. It’s important to note that Nvidia couldn’t automatically apply its gaming GPUs to other areas because the company had designed the GPU specifically for graphics. But to work in general computing and later AI, the GPU couldn’t stick to graphics. It would have to run math-intensive programs.

The solution? Develop a parallel computing solution that would allow developers to program GPU cores for these math-oriented tasks. Nvidia did just that, developing CUDA.

Thanks to CUDA, the GPU has expanded well beyond gaming and successfully into the high-growth area of AI.

Now, it isn’t just CUDA itself that’s a moat for Nvidia; after all, any tech giant could develop a parallel computing platform. The moat is CUDA’s user base, with installations across more than 100 million computers.

The “single most important thing” for Nvidia

“Our single most important thing today is the install base of CUDA,” Huang said recently in an interview with podcaster Lex Fridman. “It’s never been just about the technology. The technology, of course, was incredible, visionary. But it’s the fact that the company was dedicated to it, stuck with it, expanded its reach.”

The idea is simple: Developers know that working on CUDA offers them this reach too, across industries and clouds. Nvidia’s platform is present in every cloud and drives more than 75% of the world’s most powerful supercomputers. On top of this, developers know that updates to CUDA come about every six months and updates to GPUs happen on an annual basis, so they can be certain that they will always have access to the leading technology.

It would be very difficult for a rival to upset this solid network that Nvidia has created, making it a top-notch moat. And that suggests growth will continue to march higher during the next stages of the AI revolution. Meanwhile, Nvidia stock today is trading at rock-bottom levels, at 21x forward earnings estimates. This offers investors an interesting entry point — but it’s Nvidia’s moat that truly makes it a screaming buy.

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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.