To The Moon

A lot of people think because they can't "see" AI, it's not real or not worth talking about. However, not "seeing" AI is not a knock against AI and the stage we're at. AI, by its nature, will not be seen most of the time, even in the future. Buteven if you could see AI out in the open, what difference would it make to the investment case? If AI was thriving to the naked eye, but semiconductors and AI software companies were just bumbling along, what difference would it make if you couldseeAI? The investment case only matters if there's serious heavy lifting going on behind the scenes to support the journey and inroads of AI. And not only is it becoming a true force of technological breakthrough - not hopium or a fad - but every major techcompany is recognizing it through tens of billions of dollars (and hundreds of billions over the next few years) in capital investments. This is no more apparent than with Nvidia's (NASDAQ:NVDA$NVIDIA Corp(NVDA)$ ) revenue growth over the next year and the new market it has carved out for AI service. AI Is Moving Forward And Isn't Any Kind Of Fad The things you do on a daily basis, like scrolling social media, searching on Bing (MSFT) or Google (GOOG)(GOOGL), or getting recommendations for food on your delivery app, are powered by some form of AI. Just because you can't talk to the AI like ChatGPT doesn't mean AI isn't being utilized behind the scenes. ChatGPT is just one outlet of many and one of the fewdirectoutlets starting to emerge. And some are seeing it and calling it a joke because it's not perfect or completely primetime-ready. Or worse yet, attitudes go so far as to call it a façade, unable to be proven out, and instead used to pump share prices. I sympathize with the idea of judging the "front of house" AI in this manner. But to be an intelligent investor, you must look beyond what your eyes can see and find where the money is flowing. Investments in AI are real, and they aren't cheap. In fact, it's likely one of the most expensive investments any company can make right now or in the last two decades. This is because utilizing AI not only requires hardware that is three-to-five times more powerful than standard workload servers, but it requires more innovations in networking, cooling, and storage. Oh, and software. Basically, AI breaks the paradigm of how a data center must be configured to provide the speed and data exchange required to input data, process it, and output results. Then it requires efficient and relatively complex software to work together. And then, for the type of AI I'm detailing, it requires input and training. It's not a quick or straightforward process. But right now, we're seeing the hardware part of the process accelerate as AI software and output have become viable enough to support customer pipelines and enhance business efficiencies. So while you don't know it, itisthere and working. It's processing the feed on your social media account, it's the recommendation you get for a restaurant down the street, and it's in your every search engine request. And these are just the basics, not the more granular automatically-fix-your-photo-background on your smartphone or video streaming framing type of abilities. Not every AI interaction is at the "Star Trek" level, but it's still AI. ChatGPT is just aformof AI you can actively and directly interact with. But, since the proof of concept has legs, hardware investments need to accelerate to support the business rollout and refine what's already been developed. Nvidia's FY24 Looks Nothing Like FY23 This is where Nvidia's outlook comes into play and how today's AI isn't vaporware like IBM's (IBM)Watson turned out to be. Instead, I'm talking about real investments by real AI-driven tech companies like Microsoft (MSFT), Alphabet (GOOG)(GOOGL), Apple (AAPL), Meta Platforms (META) (see myMETA AI analysis here), and many other smaller tech startups and platforms. For Nvidia, Data Center has a more optimistic outlook for the year than Gaming. And this is because of the investments these cloud providers are making with the company's H100 GPUs. Now, some may point out its Data Center segment was weak this past quarter. And they are correct. However, the sequential weakness from the Data Center side was mainly attributable to "lower sales in China...largely in line with...expectations, reflecting COVID and other domestic issues." A small amount was attributable to cloud providers pausing their purchases at year-end to regroup for the year ahead, but it was mainly the China softness. But this is where the weakness ends for the foreseeable future. This key piece of information from the earnings call Q&A sounds extremely bullish for Data Center revenue growth: We do expect a sequential growth in terms of our data center,strong sequential growth. And we are also expecting a growth year-over-year for our data center.We actually expect a great year with our year-over-year growth in data center probably accelerating past Q1. - Colette Kress, CFO,FQ4 '23 Earnings Call Q&A That's a resounding bullish guide for AI and general data center build-out. The hardware - A100, H100 type - is a massive piece of the revenue growth puzzle and shouldn't be minimized. However, the software side of the equation shouldn't be ignored, either. Management detailed software as a direct source of revenue or otherwise in-kind with the full stack it offers. We've talked about our software revenues beingin the hundreds of millions. And we're getting even stronger each day as Q4 was probably a record level in terms of our software levels. - Colette Kress, FQ4 '23 Earnings Call Q&A Both hardware and software are key components in the growth of Nvidia, but it's not so much the sales themselves I'm interested in. Instead, I'm interested in the landscape and environment it operates within.Thisis what drives the AI case forward, not the intangible understanding of how much revenue is tied to a current quarter - or even a year - based on which cloud provider is buying. AI-As-A-Service CEO Jensen Huang describes the current environment as the "urgency" of enterprises and cloud providers to participate in AI. And to do so, these enterprises and AI-focused businesses need direct help. Nvidia has put itself in a position to be the curator of that help: The cumulation of technology breakthroughs has brought AI to an inflection point. Generative AI's versatility and capabilityhas triggered a sense of urgency at enterprisesaround the world to develop and deploy AI strategies. Yet, the AI supercomputer infrastructure, model algorithms, data processing and training techniques remainan insurmountable obstacle for most. ... We are partnering with major service - cloud service providers to offer NVIDIA AI cloud services,offered directly by NVIDIA and through our network of go-to-market partners, and hosted within the world's largest clouds. - Jensen Huang, FQ4 '23 Earnings Call And this is different than sellingjusthardware or even hardware and software. This is tapping into an Nvidiaservice.This isn't just a here-you-go type of business but a here-let-me-help-you service. And not only does Nvidia provide everything you need to get your business AI-active, but it also gets paid by cloud providers to install its H100 hardware and AI OS (operating system) stack into their clouds. Huang goes into more specifics during the Q&A session on the FQ4 call: ...by putting NVIDIA's DGX supercomputers into the cloud with NVIDIA DGX cloud, we're going to democratize the access of this infrastructure, and with accelerated training capabilities,really make this technology and this capability quite accessible. Here's the thing. If AI was a fad, hopium, or whatever Gen-Z description you can come up with, enterprises worldwide wouldn't be putting their business on an AI track, and Nvidia wouldn't have a market to provide an AI cloud service using its own hardware and software. AI, at its basic level, massively accelerates what a company can do otherwise. So whether you design clothing or edit videos, AI processes can allow you to do it faster. Whether it means modeling clothing before it leaves your workstation screen or doing video edits or effects not possible with the hours you have (or even as good), it can make your end product arrive quicker and more refined. Now, the clothing designer may not be developing the AI itself, but they'll be utilizing it when the vendor of the design software pushes out their latest version. The point is, if every other company you compete with is getting its business done faster, you have no choice but to get on the train to keep up. This positive feedback loop is what's driving AI across all businesses and enterprises. If AI weren't working, it wouldn't be forcing others to keep up. Instead, the move would be to forgo AI altogether and keep doing it the "legacy" way. But I can't find any company with the understanding of where it's headed taking the legacy route. 2+2+2=AI Not only will Nvidia supply the acceleration hardware and software, but it'll provide you with the entire package as a service. That's hardware + software + service to give a company the advantage of AI. From a revenue growth expectation perspective, we may not even be seeing the estimates for this service show up yet. Even still, I expect the Data Center segment to deliver $17.8B in revenue in FY24. That's $2.8B more than FY23, or nearly 19% growth year-over-year, and doesn't include its AIaaS taking off. That's on top of the already record year FY23 was for Data Center. The feedback loop AI is creating proves it's not a fad. It's driving innovation well beyond simple "interest" in the technology. It's at a stage where it's beginning to prove itself useful on many levels. For a business to keep up, it must incorporate AI to get things done more efficiently (meaning less employee overhead) and produce a better product. As I've said before, arecession is a tailwind for AIbecause employee layoffs lead to utilizing AI more, and using AI more leads to more employee layoffs. Expect Nvidia to outperform expectations over this year, especially later in the year. When its AIaaS begins to take off, it'll move the needle a lot more than the 19% growth I expect in the Data Center business. Allowing companies who just the other week were incapable of getting their hands on AI to have the complete package through an interface changes the entire landscape. No one else has the resources Nvidia does to pull this off, not for a while. Every other AI hardware/software company is always missing one thing: the complete package. And Nvidia is now delivering just that. Source: seeking alpha