Arm CEO Rene Haas Calls AI the “Most Profound Opportunity in Our Lifetimes.” 1 Stock I’ll Be Buying Hand Over Fist if He’s Right.

There is no denying that artificial intelligence (AI) has had an impact on the trajectory of the market over the past year. Some would even argue that the latest advances in AI helped spark the 2023 rally, lifting Wall Street out of the bear market doldrums.

Generative AI promises to unleash a wave of increased productivity, and stock market experts are still debating its ultimate value. Most estimates start around $1 trillion and go up from there.

An opportunity of this magnitude has companies and investors scrambling to get their share of the pie. Unfortunately, this wild ride prompts others to denounce the trend as a bubble or hype.

This is not the case, says Arm holds CEO René Haas. In an interview with Bloomberg Technology, the CEO said: “AI is by no means forming a hype cycle. We believe AI is the most profound opportunity of our lifetime, and we are only at the beginning. “

It's a bold statement, but one that resonates in the halls of the world's biggest tech companies. If Haas is right – and I believe he is – there is one AI stock that I will continue to buy hand in hand: Nvidia (NVDA 3.58%).

Image source: Getty Images.

Jack be agile…

It's worth taking a step back and looking at how Nvidia has become one of the dominant forces in technology today. The company pioneered the modern graphics processing unit (GPU), which can render realistic images in video games.

The technology that made all of this possible is parallel processing, which can tackle complex mathematical processing tasks by breaking them down into manageable bits and executing them simultaneously. Nvidia quickly realized that this technology had much broader applications, and applied it to earlier versions of AI, cloud computing, data centers, self-driving technology, and more.

The company has quickly gained a head start in machine learning – an earlier branch of AI – and holds about 95% of that market, according to New Street Research. So when generative AI arrived, Nvidia was ready.

Much of today's demand for AI comes from cloud infrastructure providers, who make generative AI available to their customers. A look at Nvidia's list of cloud computing customers reads like a who's who of technology: Amazon Web Services, Microsoft Azure, Alphabetis Google Cloud, and IBM Cloud all use Nvidia processors in their cloud operations, just like Oracle Cloud, Baidu AI Cloud, Ali Baba Cloud, and Tencent Cloud.

Nvidia is the gold standard for data acceleration over the ether, controlling about 95% of GPUs used in the data center market, according to CFRA analyst Angelo Zino. Yet this opportunity is largely untapped. Rosenblatt analyst Hans Mosesmann says AI has triggered an upgrade cycle in the data center industry to meet the computing demands of generative AI. With an installed base worth around $1 trillion, the runway is long.

Jack, hurry…

The speed with which Nvidia innovates makes it difficult for its competitors to gain ground. As soon as a competitor offers a processor close to Nvidia's capabilities, the company is ready to introduce the next generation of its ultra-fast chips. The reason? Nvidia has an ever-increasing research and development (R&D) budget that could keep a small country running.

For example, in Nvidia's fiscal 2023 (ended January 29, 2023), the company spent 27% of its total revenue, or $7.34 billion in total, on R&D, creating the next generation of its cutting-edge technology. Nvidia has already spent $6.2 billion in the first three quarters of fiscal 2024, and that figure will undoubtedly be higher when Nvidia releases its annual report later this month.

This significant spending has allowed the GPU pioneer to stay ahead of the AI ​​curve, as its recent results clearly show. During its third fiscal quarter 2024 (ended October 29), Nvidia generated a record revenue of $18.1 billion, up 206% year-over-year. This translated into diluted earnings per share of $3.71, up 1,274%. Despite easy results following last year's market crash, the results were nevertheless remarkable.

Some investors cite Nvidia's high valuation as a reason to avoid the stock – an understandable but myopic view, in my opinion. The stock sells for 92 times earnings and 39 times sales, which seems scandalous on its face, but doesn't take into account the company's triple-digit growth, which management expects to continue. However, using the more appropriate price-to-earnings-to-growth (PEG) ratio reveals a valuation below 1 – the norm for an undervalued stock.

Given the company's leadership position, track record of growth, and surprisingly modest valuation, Nvidia is the stock I plan to continue buying if AI is indeed “the most important opportunity in our life “.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena holds positions at Alphabet, Amazon, Baidu, Microsoft, Nvidia and Tencent. The Motley Fool holds positions and recommends Alphabet, Amazon, Baidu, Microsoft, Nvidia, Oracle and Tencent. The Motley Fool recommends Alibaba Group and International Business Machines. The Motley Fool has a disclosure policy.

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