AI spending momentum boosts NVIDIA's growth prospects, with stock prices expected to reach new highs

According to the Zhītōng Finance app, amidst various uncertainties surrounding the Federal Reserve policy, economic conditions, and the U.S. presidential election, at least one thing is clear on Wall Street - that artificial intelligence spending remains a top priority. Major companies are investing billions of dollars in building AI infrastructure and services, making the growth prospects of "shovel seller" NVIDIA (NVDA.US) almost a sure thing.

NVIDIA is set to announce its second-quarter earnings on August 28th Eastern Time. The latest financial report from this AI chip giant is expected to further clarify the demand for artificial intelligence and may drive its stock price back to record levels.

Erik Swords, Chief Portfolio Manager at Voya Investment Management, stated, "We are still far from completing the construction of AI infrastructure, which gives people a good expectation for growth in the coming years." "Therefore, although we may see fluctuations in the short term, we are not worried about the medium to long-term performance of these AI hardware stocks."

During the second-quarter earnings season, some tech companies that have made significant investments in AI are not well-received by investors, as they begin to question how much return such massive spending can generate. This concern has led to selling pressure on tech stocks, despite signs of resilient economic growth and increasing investor confidence in the strength of AI spending, making the pullback in these tech stocks easily seen as a buying opportunity.

Led by AI hardware and chip companies, the Nasdaq 100 index has rebounded from its lows in August. Among them, NVIDIA performed the best, with a nearly 30% increase, just 6.1% away from its historical high. Micron Technology (MU.US), Marvell Technology (MRVL.US), Super Micro Computer (SMCI.US), Broadcom (AVGO.US), AMD (AMD.US), and Arm (ARM.US) all played leading roles in this rebound.

Previously, several large tech companies including Microsoft (MSFT.US), Amazon (AMZN.US), Alphabet (GOOGL.US), and Meta (META.US) have emphasized their investment commitments in the field of artificial intelligence, with these companies contributing to over 40% of NVIDIA's total revenue. The CEOs of Alphabet and Meta stated that they would rather overspend on AI than risk underinvesting in this technology. Given the financial strength of these players, their investment commitments indicate that even in a weakening economic backdrop, AI spending will remain enduring. Additionally, the strong monthly sales of Taiwan Semiconductor (TSM.US) also indicate that AI demand remains robust.

Senior portfolio manager Bryant Vancronkite of Allspring Global Investments said, "Regardless of their intentions and purposes, these large tech companies will not limit their resources. If they feel that missing out on artificial intelligence will jeopardize their dominant position, their spending on artificial intelligence will continue for many years."

The construction of artificial intelligence infrastructure is expected to be expensive and long-lasting. Needham cited a conversation with the CEO of a generative artificial intelligence infrastructure company, stating that the investment in data center infrastructure to support generative artificial intelligence could reach $6 trillion.

Nevertheless, there is evidence that the market does not fully understand this trend. Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, estimates that by 2025, capital expenditures of large tech companies could grow by 25%, well above the general expectation of 10-15%. She stated that this "is particularly favorable for the semiconductor sector, a driver of artificial intelligence."

For NVIDIA's largest customers, spending on artificial intelligence has not yet translated into significant improvements in growth and efficiency. However, analysts believe that the current pace of spending is sustainable. Morgan Stanley stated that the average capital expenditure intensity (measuring the ratio of capital expenditure to revenue) is around 25%, which is a "healthy level." In addition, the ratio of capital expenditure to earnings before interest, taxes, depreciation, and amortization (EBITDA) "indicates that there is enough cash flow to support spending." Analyst Charlie Chan stated that NVIDIA's performance "will alleviate people's concerns and drive a rebound in the entire artificial intelligence supply chain's stock prices."

It is certain that some people still do not believe that spending on artificial intelligence is enough to continue boosting artificial intelligence hardware stocks, as their price-to-earnings ratios leave little room for disappointment. Some companies, including AMD and Dell Technologies (DELL.US), have performed strongly recently but are still struggling to regain momentum from earlier this year.

Bryant Vancronkite said, "If you can ensure the sustainability of profit margins, then NVIDIA's valuation is reasonable. But the risks seem greater because if these companies stop spending, they can get returns, while hardware companies will only face negative impacts." "We are not yet at the point where investors are ready to sell stocks, but they are starting to question the return on investment in artificial intelligence, which is the first step before actions become more dramatic."