NVDA ~90% Up YTD! Can It Keep Going?

AI has nearly doubled the stock price of the graphics card manufacturer despite Ethereum going to proof of stake, but will demand keep up at the current pace?

Secular Trend or Fad?

At Micron's earnings report, the company's CEO Sanjay Mehrotra characterised AI as a secular driver of demand for chips, particularly memory. Micron is one of Nvidia's suppliers, particularly for memory that's used in graphics cards. The processing of graphics cards is seen as a key component for developing AI. Further demand for AI would require additional processing capacity from Nvidia's DGX AI supercomputers.

The more intense use of graphic processing capacity is for visual AI, that is, programs which generate images, including the latest ChatGPT version 4.0. But there are questions about the staying power of AI image generation. On the one hand, the popularity of certain tools has already receded following a surge in demand. Meanwhile, artists who feel threatened by image generation technology have initiated a class action suit, seeking to limit AI from using their images as training. This could significantly reduce the capabilities of image-generating AI and the appeal to users. But then, there is increasing demand from auto manufacturers.

Hope or Reality?

Despite the surge in interest in AI at the end of last year, NVIDIA saw a 21% decline in revenue during the fourth quarter as Ethereum went from proof-of-work to proof-of-stake. Semiconductor equipment spending is expected to decline at a similar rate of 22% this year, with a rebound expected the year after 2024. The semiconductor industry is still not out of the woods yet.

Data center capabilities remain the company's key source of income, with annual growth of 41%, compared to the gaming division, which saw a drop of 27% in sales over the same period. However, the CEO expressed hope that the situation in the gaming space might be about to turn around from the post-pandemic slump. NVidia's pivot from gaming to data centres seems to have paid off. Now it's a question of whether the division can keep up with the demand for more AI processing capacity.

NVDA Bid Within Channel

The price action of NVDA has been trending up this year, with no substantial corrections in sight. And as long as bulls manage to keep their prices within the ascending channel, the next major resistance lies at $300. Losing the floor, which appears to be around $260/shr at the moment, might trigger a larger selloff towards the low of $200, if not $225.

Source: Spreadex / NVDA

Key Takeaways

AI has nearly doubled the stock price of Nvidia despite Ethereum going to proof of stake, but there are questions about demand keeping up at the current pace. However, there are questions about the staying power of AI, particularly for memory-intensive applications like image generation. NVDA's data centre capabilities remain the key source of income so far, while gaming continues to suffer.