Wall Street Predicts Nvidia Will Win Big From ChatGPT Hype

Since the ChatGPT artificial intelligence tool was released, Nvidia Corp. has become the preferred choice for Wall Street traders looking to profit from its potential.

OpenAI's chat bot has been one of the driving forces behind the chipmaker's stock rally this year. The bot has demonstrated an uncanny ability to mimic human writing, which has generated a lot of excitement and hype. This has helped the company's stock to outperform the broader market, with gains of 29% so far this year.

Nvidia's dominance in the market for graphics chips designed for complex computing tasks needed to power AI applications gives it a clear advantage in the ChatGPT market. The more people use ChatGPT, the more computing power its owner OpenAI requires to generate responses to the millions of queries received from lazy students with essay assignments or struggling songwriters.

On Monday, Microsoft Corp. announced that it was making an investment in OpenAI. The funding is needed by OpenAI to ramp up computing power and will likely only bolster demand for Nvidia chips. Shares of Nvidia jumped as much as 6.5%.

Citigroup Inc. has estimated that Nvidia's sales could increase by $3-11 billion over the next 12 months, thanks to the rapid growth of ChatGPT. Analyst Atif Malik has acknowledged that it's difficult to predict growth for such a new service, but he based his values on projections for the number of words generated by ChatGPT and the revenue per word for Nvidia.

Nvidia's ChatGPT could be a significant driver of compute demand, according to Malik's research note last week.

Bank of America Corp. said that Nvidia is at the forefront of the companies that stand to benefit from growth in so-called generative AI. Wells Fargo & Co. said that upcoming chips from Nvidia are well positioned to take advantage of greater computing needs required by AI models like ChatGPT.

It's possible that the new service is just a fad that will die out like orders for cryptocurrency miners, which have surged and crashed multiple times over the last few years. Nvidia investors, and those who put money into other semiconductor makers in late 2021, know that the promise of continuous growth can be an illusion. After sales surged more than 50% in each of Nvidia's past two years, revenue is projected to be flat in fiscal 2023 at about $27 billion.

As cloud computing has become more popular, graphics chips have become increasingly important. Graphics chips are used to process and render images, and they are essential for many cloud-based applications. Without graphics chips, cloud computing would be much slower and less effective.

Nvidia shares have lost almost half their value since peaking in November 2021. Despite the selloff, the stock remains one of the most expensive in the Nasdaq 100. Its price is about 41 times profit projected over the next 12 months, well above its average over the past decade.

Analysts believe that the stock will increase by 13% to $200.68 over the next 12 months, based on the average price target.

Ivana Delevska, chief investment officer at SPEAR Invest, believes that even if ChatGPT does not result in higher orders for Nvidia, its success will fuel the development of more tools that will require greater computing power and therefore more chips.

Delevska believes that the popularity of cryptocurrency will lead to more investment from companies wanting to get involved in the space. She cites Nvidia as one of the firms leading the way in this area.

The Nasdaq 100 Index rose 2.9% on Friday, its biggest gain since November, following strong results from Netflix Inc. and after Alphabet Inc. announced 12,000 job cuts. The index has been rallying as technology firms turn their focus on cutting costs and inflation shows signs of cooling. The tech-heavy gauge rose for a third consecutive week, its longest such streak since August.