This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

NVIDIA’s shockingly good guidance upgrade is the talk of the town right now, with investors salivating at the prospect of bagging rip-roaring gains in the months ahead, fueled by a rapacious appetite for all things AI-related. However, the failure of investors to distinguish between the quantum of computational resources required for generative AI inference and fine-tuning vs. those needed for training can prove to be a costly bet in the medium term.

$NVDA IPO'd on 22 January 1999, so it's been public for ~24 years

What is astounding is that a quarter of its entire market value has come in the last 17 hours

— Simon Ree (@simon_ree) May 25, 2023

As a refresher, NVIDIA announced this week that it now expects to record $11 billion (plus or minus 2 percent) in revenue for the second quarter of its fiscal year 2024. This blowout guidance was a whopping 55 percent above the prevailing consensus estimate of $7.1 billion, resulting in the biggest one-day gain in the market capitalization of a US stock.

Additionally, NVIDIA’s CEO, Jensen Huang, noted in the company’s Q1 2024 earnings press release:

“A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”

Huang went on to observe:

“Our entire data center family of products — H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand and BlueField-3 DPU — is in production. We are significantly increasing our supply to meet surging demand for them.”

Of course, questions remain as to how many jobs will have to be replaced by AI to make this envisioned $1 trillion data center reorientation feasible. As per an estimate by Goldman Sachs, around 300 million middle/upper-class jobs in the US and EU will be rendered obsolete as a result of the AI phenomenon.

NVIDIA NTM Price-to-Earnings Ratio

As a result of a scorching rally this week, the stock was recently trading at an NTM P/E multiple of 43.2x. However, the consensus remains that NVIDIA shares are heading to a 50.0x valuation.

Currently, analysts expect NVIDIA to record an EPS of $2.06 in its ongoing second quarter. Annualizing this yields an NTM estimate of $8.24. If NVIDIA manages to achieve an NTM P/E multiple of around 50x, it will correspond to a stock price of $412, assuming everything else remains constant. For reference, the stock is currently trading at $377.

Forget 10-baggers, NVIDIA $NVDA is now a 100-bagger over the last 10 years. Up more than 11,000%. pic.twitter.com/hhEIwwv2yj

— Bespoke (@bespokeinvest) May 25, 2023

Of course, the gains that investors are currently anticipating far outstrip the back-of-the-envelope calculation above. After all, this is the stock that has returned around 12,000 percent since the beginning of 2013. Nonetheless, investors do risk ending up in a blind alley.

I'm fairly puzzled by $NVDA skyrocketing.

GenAI inference and fine-tuning will significantly outweigh GenAI training in overall compute.

When it comes to inference and fine-tuning, NVIDIA's advantage in software won't hold much significance. They will inevitably have to face…

— Soumith Chintala (@soumithchintala) May 25, 2023

As explained in the tweet above, much of the future AI-related computational needs would center on generative AI inference and fine-tuning, which is software-driven. Basically, inference workloads are expected to become homogenous enough to allow for the commoditization of the underlying software, thereby chipping away NVIDIA’s advantage. Moreover, increased competition from the likes of AMD and custom silicon is also a given at this point.

In this environment, NVIDIA can enjoy a free run for the next 1.5 years before the proverbial chickens come home to roost.

WEDBUSH: "For any investor calling this an #AI bubble .. we would point them to this $NVDA quarter and especially guidance which cements our bullish thesis around AI and speaks to the 4th Industrial Revolution now on the doorstep .." @DivesTech

— Carl Quintanilla (@carlquintanilla) May 25, 2023

In the meantime, the AI pump continues to plow ahead at full steam.