Chris Neiger, The Motley Fool
5 min read
Investors are skeptical of many AI stocks right now, questioning the long-term return on investment for tech companies spending so much on data center infrastructure. And as a leading semiconductor company for AI infrastructure, Nvidia (NASDAQ: NVDA) has felt the pain from the sell-off, with its share price falling 13% over the past month.
That’s put Nvidia’s share price at around $202, far below analysts’ average price target for Nvidia stock of $327. If it reaches that target, investors stand to gain around 62%. So, is now the right time to buy Nvidia stock, despite the concerns about AI spending?
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
I think so, especially given that recent tech earnings reports indicate tech companies are likely to continue investing in infrastructure over the next few years.
AI spending continues to ramp up
Let’s start with SK Hynix‘s (NASDAQ: SKHY) recently reported third-quarter results. The company is the leading high-bandwidth (HBM) memory company with 50% market share and the second-largest DRAM and NAND flash memory company with 24% and 19% market share, respectively.
The company has benefited immensely from a ramp-up in AI spending, sending its sales 328% higher in the quarter and its operating profit up 632%. Even more impressive is that the company’s management said in a press release that 50% of its available memory supply for 2027-2028 is already sold out — and that it expects its supply to remain constrained through 2030.
What does this have to do with Nvidia? Well, SK Hynix is the leading supplier of HBM memory for many of Nvidia’s data center components. If SK Hynix is experiencing exponential demand for its memory processors, part of that is due to Nvidia placing substantial orders. And if Nvidia is placing large orders for memory, it’s because AI spending continues to rise.
This leads me to Alphabet’s and Microsoft‘s recent cloud sales. These two companies hold a combined 35% of the cloud market, and they’re both experiencing impressive sales gains from their AI spending. Google Cloud revenue more than doubled in the third quarter to $30.7 billion and Microsoft’s Azure sales rose 48% to $33.2 billion.
Alphabet says it will spend up to $205 billion this year in capital expenditures (capex), mostly for AI. Microsoft says it will spend $170 billion in fiscal 2027. That’s an acceleration of spending for both companies and it’s a result of Microsoft and Alphabet realizing that their cloud investments are paying off.
