Wall Street bets big on Nvidia's ChatGPT windfall

While millions of people are asking ChatGPT to write essays and code snippets, Wall Street has settled on a much simpler way to play the AI revolution: buy the company that powers all of it.

Nvidia shares have surged 29% since the start of the year, making it one of the top performers in the S&P 500. On Monday, after Microsoft announced a multi-year, multi-billion-dollar investment in OpenAI, Nvidia stock jumped as much as 6.5% during the trading session.

The compute toll booth for generative AI

The math driving the rally is straightforward. Generative models require massive amounts of computing power, and Nvidia holds a dominant grip on the market for GPUs that handle these complex workloads. Every student prompt and every AI query burns server cycles.

Citigroup analyst Atif Malik estimated last week that rapid growth in ChatGPT usage could generate between $3 billion and $11 billion in sales for Nvidia over the next 12 months. Malik based his projection on the estimated number of words the chatbot generates and the hardware revenue Nvidia pulls in per word.

Bank of America now views Nvidia as the primary beneficiary of generative AI, while Wells Fargo noted that Nvidia’s upcoming chips are well positioned to capture the rising demand. Ivana Delevska, chief investment officer at SPEAR Invest, pointed out that ChatGPT’s success will spark a domino effect. Even if ChatGPT itself moderates, dozens of competing companies will have to pour capital into chips just to catch up.

The lingering hangover from crypto

Still, seasoned semiconductor investors have seen this movie before. The explosive boom-and-bust cycles of cryptocurrency mining over the last few years proved that seemingly endless chip demand can evaporate practically overnight.

After two consecutive years of revenue climbing over 50%, Nvidia’s sales for fiscal 2023 are projected to remain roughly flat at around $27 billion.

Furthermore, even after falling roughly 50% from its peak in November 2021, Nvidia remains one of the most expensive stocks on the Nasdaq 100. It trades at roughly 41 times projected earnings over the next 12 months, well above its 10-year historical average. Wall Street's consensus 12-month price target sits at $200.68, implying a modest 13% upside from current levels.

Why it matters

For builders and tech enthusiasts, Nvidia's dominance is a reminder that the generative AI boom carries an enormous hardware bill. Building and running state-of-the-art models remains prohibitively expensive. Unless you have Microsoft-level balance sheets, the immediate path forward is leveraging existing APIs and focusing on niche application layers rather than training frontier foundation models from scratch.

Across the industry, Nvidia has positioned itself as the indispensable toll collector of the AI gold rush. Microsoft's $10 billion bet on OpenAI is effectively a commitment to spend billions on data centers and high-end GPUs. This dynamic is going to force competitors like Google and Amazon into aggressive capital expenditures, while intensifying the long-term push toward in-house custom silicon to escape Nvidia’s high margins.

We think the market's enthusiasm for Nvidia's near-term monopoly is well-founded, as its software and hardware moat in AI training is unmatched. However, trading at 41 times forward earnings leaves zero room for error. If consumer novelty wears off or monetization models fail to justify the staggering server costs, Nvidia could easily suffer another sharp valuation hangover.