Nvidia investors just got a $1 trillion reason to be even more bullish

By Emily Bary

Nvidia's stock gains as a new report projecting big growth in the AI market offers some relief to investors worried about the pace of AI spending beyond next year

Worried about Nvidia Corp.'s ability to sustain growth over the next few years? Perhaps there's a new reason investors shouldn't panic.

Mizuho desk-based analyst Jordan Klein is intrigued by a recent Bain Technology report, which projected that the market for artificial-intelligence hardware and software could grow to as much as $990 billion by 2027 from about $185 billion now.

"This forecast could calm buy-side worry/uncertainty over sustainability of large cloud [capital expenditures] and AI investment spending well beyond 2025," Klein wrote.

The main fear he hears from Nvidia (NVDA) investors is about the pace of AI capital spending in calendar 2026 and beyond. Big cloud companies have been making heavy investments in AI hardware recently, but the concern is they could rethink their spending if AI doesn't deliver the necessary returns on investment. While the companies largely have signaled that they intend to grow spending next year, there is "zero clarity around growth rates for [2026] on capex spend," according to Klein.

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The Bain report weighed in broadly on the potential for future growth in data-center graphics processing units, saying that demand "will continue to grow as [large-language models] expand capabilities to processing multiple data types simultaneously (text, images, and audio) and as venture capitalists pour even more money into AI start-ups."

"If data center demand for current-generation GPUs doubled by 2026 - a reasonable assumption given current trajectory - suppliers of key components would need to increase their output by 30% or more in some cases," the report continued.

Klein also was encouraged by last week's power-purchase agreement inked by Microsoft Corp. (MSFT) and Constellation Energy Corp. (CEG)

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Asked Klein: "Would [Microsoft] sign a 20-year nuclear-power-purchase/supply agreement with Constellation Energy spending $1.6 billion alone to restart the facility that doesn't begin power [generation] until 2028 if they planned to slow or pare back current capex growth and AI investment? No!"

Nvidia shares are up another 2.9% in Wednesday trading after rising about 4% on Tuesday.

See more: Nvidia's stock is no longer the S&P 500's top gainer this year. Here's what is.

-Emily Bary

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09-25-24 1044ET

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