Nvidia and its stock may go through an Apple-like transformation. What it would mean for investors

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Nvidia ‘s wise push into software and services is getting more attention on Wall Street, with one analyst drawing a parallel between Jim Cramer’s two “own it, don’t trade it” names. The emergence of chip powerhouse Nvidia as a major AI winner over the past year has been fueled by surging hardware sales — specifically, its powerful graphics processing units (GPUs) that were used to train the model that powers OpenAI’s ChatGPT . However, Nvidia has also established a fast-growing software and services business that over time could also deliver significant benefits to investors, analysts at Melius Research said in a note to clients Monday. We agree wholeheartedly, having cheered Nvidia’s software push for nearly a year . Software and services “Nvidia’s business is evolving faster … and software sales can help smooth out volatility,” Melius analysts argued. The heightened focus on Nvidia’s software and services initiatives comes as some on Wall Street have been increasingly questioning the sustainability of demand for the company’s leading AI chips. While consensus points to another good year, some worry about demand moderating in 2025. Investors typically assign a premium to software-related earnings compared with those tied to hardware. That’s because software sales are generally recurring and more predictable. The stock prices of hardware companies that shift toward software can benefit from what’s known as “multiple expansion.” Instead of paying 20 times forward earnings for the stock of a hardware-focused company, an investor may eventually be willing to pay to 30 times as software becomes more prominent. Under that scenario, all else being equal on the amount of company earnings, the stock becomes worth more. NVDA AAPL 5Y mountain Nvidia vs. Apple 5 years That’s what could happen at Nvidia, whose shares have surged another 24% so far this year after more than tripling in 2023. It was the best-performing stock in the S & P 500 last year. Nvidia currently trades at nearly 29 times forward earnings, though its valuation at this point likely does not fully account for the potential of software. In making its case Melius points out that Apple traded at roughly 15 times forward earnings in early 2019 before investors “appreciated the potential of its services business.” The stock currently trades at approximately 29 times as Services sales expanded to 22% of total revenue in fiscal year 2023, up from about 18% in fiscal year 2019. Apple and Nvidia are Jim’s only “own, don’t trade” stocks. In December, analysts at Piper Sandler also struck a bullish tone on Nvidia’s software opportunity. The core of Nvidia’s software strategy is DGX Cloud, an AI supercomputer accessible through a web browser, that the company rolled out in March 2023. DGX Cloud offers a bit of a twist on the traditional practice of selling GPUs to cloud-service providers like Club holding Microsoft’ s Azure, which then charges its customers for access to the AI chips. With DGX Cloud, Nvidia essentially becomes the company paying cloud-service providers for time using the GPUs, Melius Research said, giving Nvidia the computational power necessary to offer an AI supercomputer service to other companies. The differentiated aspect of the DGX Cloud is it also has additional AI software and tools, such as pre-trained models, data libraries and access to Nvidia service representatives. That helps companies more quickly build and deploy their own AI applications, Nvidia argues. DGX starts at $36,999 a month. Nvidia’s software and services offering has been picking up pace, even though it remains a small part of the company’s projected $59 billion in total revenue for fiscal 2024, which ends in January. In November, alongside its third-quarter earnings report, Nvidia said its software and services business, including DGX Cloud, was on pace to generate $1 billion in annualized revenue by year-end . In August, management said the business line was on track for hundreds of millions of dollars in annual sales — a clear sign adoption has accelerated. Within a few years, Nvidia’s standalone software and services business could reach $3 billion in annual revenue, Melius Research suggested Monday, “providing long-term margin support.” Hyperscalers benefit Cloud-service providers, or so-called hyperscalers, have also benefited from having DGX Cloud on their platforms, Melius said, which could have positive near-term implications for two other Club names: Alphabet and Amazon . Oracle and Microsoft — the first two companies to offer DGX Cloud — demonstrated strong growth in their cloud divisions in the quarters shortly after Nvidia’s service became available on their respective platforms. Oracle, which last March became the first to host DGX Cloud, reported strong growth in its cloud division in the second quarter of calendar year 2023, Melius argued. Meanwhile, Microsoft’s Azure, which launched DGX Cloud over the summer, “not so coincidentally” showed a revenue acceleration in the third quarter ended Sept. 30, Melius said. “If the pattern holds,” Melius wrote, then Google Cloud is next in line to see a boost from DGX Cloud customers followed by Amazon “since its much-needed warm embrace of Nvidia came a bit later than others.” Google Cloud said in August that DGX Cloud would soon be available on its platform, suggesting its fourth-quarter results may begin to show the related financial boost, Melius said. Amazon Web Services (AWS), meanwhile, made a similar announcement in late November , so its uplift could still be one to two quarters away, Melius said. We were upbeat on the developments at the time and look forward to any added benefit. (Jim Cramer’s Charitable Trust is long NVDA, MSFT, AAPL, GOOGL and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Jen-Hsun Huang, president and chief executive officer of Nvidia Corp., speaks during the company’s event at Mobile World Congress Americas in Los Angeles, California, Oct. 21, 2019.

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Nvidia‘s wise push into software and services is getting more attention on Wall Street, with one analyst drawing a parallel between Jim Cramer’s two “own it, don’t trade it” names.