Nvidia's AI Ecosystem Masterplan Is Driving Its Stock

Nvidia (NASDAQ:NVDA) shares have increased by nearly 11% in the last week, and is still up almost 40% over the last 30 days. While wider markets have risen after China and the U.S. declared a 90-day halt on tariffs, which is considered a step toward de-escalating the global trade conflict, there have also been a number of company-specific positives for Nvidia as well.

Nvidia Establishing AI Benchmarks

Nvidia has introduced NVLink Fusion, a new interconnect technology for chip-to-chip communications that aims to enhance the capabilities of AI systems. Importantly, the company indicates that it will license this technology to other chip designers, allowing them to develop rapid and high-performing custom AI chips. This enables third-party providers to construct semi-custom AI systems that still integrate with Nvidia’s ecosystem. This strategy broadens Nvidia’s reach within the custom AI hardware sector beyond its own products. Firms like Marvell and MediaTek intend to integrate Fusion into their custom AI system designs. This could be a strategic long-term initiative for Nvidia, as it may encourage companies to commit to its software suite. It could be a move towards Nvidia establishing de facto standards for AI hardware, similar to how Intel influenced the PC sector with its x86 architecture.

Significant GPU Orders from Saudi Arabia

During President Donald Trump’s trip to the Middle East earlier this month, Nvidia CEO Jensen Huang declared that the company would deliver over 18,000 Blackwell AI chips to an AI startup based in Saudi Arabia called Humain, for application in its AI data centers. The so-called “sovereign AI” sector, which encompasses government-sponsored projects to establish domestic AI capabilities, is gaining significant importance for Nvidia as it seeks to lessen its dependency on American technological giants. Various companies, including Amazon, Meta, Google, and Microsoft, are collectively estimated to make up more than 50% of Nvidia’s revenue. Many of these corporations are also working on their own AI chips, making it even more critical for Nvidia to balance its investments.

Nvidia Stock Has Been Characterized by Volatility

Currently, the rise in NVDA stock over the past four years has been anything but steady, with annual returns being much more erratic than the S&P 500. The stock achieved returns of 125% in 2021, -50% in 2022, 239% in 2023, and 171% in 2024. The Trefis High Quality (HQ) Portfolio, consisting of 30 stocks, displays significantly lower volatility. Furthermore, it has consistently surpassed the S&P 500 in the last four years. What accounts for that? Overall, HQ Portfolio stocks have demonstrated superior returns with reduced risk compared to the benchmark index, providing a smoother ride as reflected in HQ Portfolio performance metrics. Considering the current unpredictable macroeconomic context concerning interest rate reductions and various conflicts, could NVDA find itself facing a similar predicament as in 2022 and underperform the S&P in the coming year, or will it experience a robust upturn?

We estimate Nvidia’s stock at approximately $101 per share, about 25% lower than the present market value. Explore our evaluation of Nvidia valuation: Is it Overpriced or Underpriced?. Several factors contribute to our current pessimism regarding the stock. We foresee a potential decline in the enthusiasm surrounding AI applications that has driven gains over the past two years, as marginal performance improvements from larger models diminish, alongside challenges in accessing high-quality training data. This transition towards more efficient models could aggravate the effects of a prospective slowdown for GPU manufacturers, including Nvidia.

Even though Nvidia stock has been an outstanding performer over recent years, shares can decline rapidly – by 20%, 30%, or even 50% – as has been observed during previous market crashes. No stock is invulnerable. What is the lowest Nvidia stock could fall to in a market collapse? It’s beneficial to stay informed.