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Nvidia Was the Best 'Magnificent Seven' Stock in 2023. Can It Repeat in 2024?

Motley Fool - Wed Dec 6, 2023

The "magnificent seven" when referencing stocks is a term created by investing personality Jim Cramer and includes the seven stocks he thinks control the market. They are:

  1. Apple
  2. Amazon
  3. Alphabet
  4. Nvidia (NASDAQ: NVDA)
  5. Meta Platforms
  6. Microsoft
  7. Tesla

This group had a phenomenal year, with the "worst" (if you can even call it a "worst" performer) being Apple, whose stock has risen by about 48% this year. On the other end of the spectrum is Nvidia, which increased by more than 200%.

That kind of performance is uncommon, but can Nvidia defend its title as the top magnificent seven stock to own in 2024?

Supercomputers for AI are creating massive demand for Nvidia's GPUs

Nvidia's 2023 rise can be attributed to one trend: artificial intelligence (AI). Its graphics processing units (GPUs) are the best available and are in high demand as companies race to build out their AI computing capabilities.

When consumers buy GPUs, they only buy one to power a computer. But when commercial customers purchase GPUs to outfit their data centers, they buy thousands. For example, Tesla's Dojo computer, which it uses to train its full self-driving (FSD) program, utilizes 10,000 H100 GPUs. While the actual cost of the H100 GPU isn't publicly available, they can be purchased second-hand for about $30,000 apiece. From there, it's pretty easy to calculate that Tesla spent around $300 million with Nvidia to outfit its Dojo computer.

Now, expand that spending to other tech giants trying to complete their supercomputers and the cloud computing companies building data centers so others can rent out the computing power, and it's pretty evident why Nvidia has had such a good year in 2023.

NVDA Revenue (Quarterly) Chart

NVDA Revenue (Quarterly) data by YCharts

In the third quarter of fiscal 2024, Nvidia's revenue rose 206% to $18.12 billion over the year-ago quarter. That's a lot of GPUs sold, and it's just getting started. In the fourth quarter, management expects revenue of $20 billion.

But with Nvidia's outstanding growth in 2023, the question remains: Can it maintain its gains in 2024?

Nvidia is a cyclical business

My biggest concern with Nvidia is that its GPUs aren't a subscription product. For example, Tesla spent a lot of money to build its computer; does it need to spend another $300 million to make another? It likely won't for a while, which concerns Nvidia's long-term prospects.

If everyone is rushing to build their AI computers now, will any business be left in a few years? That's my biggest problem with investing in Nvidia, and it does not have an obvious answer until after the demand disappears (or doesn't).

But Nvidia's stock price requires that the demand stays around and grows, as it has a premium valuation of 62 times earnings. With the stock's valuation, Nvidia must continue growing at warp speed, or the bottom may fall out of the stock. Additionally, if its sales drop due to demand deterioration, Nvidia's stock will also likely fall alongside it.

While it's unknown if the demand for its GPUs will stay strong in 2024, eventually it will see some headwinds. As a result, I would be shocked if Nvidia ends up being the best-performing "magnificent seven" stock in 2024.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and Tesla. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

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