The generative AI market is in the second year of 3-5 year deployment cycle, says BofA’s Vivek Arya

NVIDIA passed Microsoft to become the most valuable company in the world by market capitalization on Tuesday when the market was last open. Joining us right now is Vivek Arya, B of A securities senior semiconductors analyst. And Vivek, what do you think? This is the big question. Can this run continue for NVIDIA? It's been an amazing turn of events and amazing huge run up in market capitalization. Yeah, good morning. I think that short term volatility is always possible, but I think like with any stock, it's really about opportunity. It's about execution and valuation. On the opportunity side, we think that the market for generative AI is just in the second year of what could be a three to five year deployment cycle. The demand for hardware could triple to 300 billion over the next few years. Secondly, I'm you know there is this temptation to compare it to the.com boom, but what is different is potentially thatthe.com boom was created by a lot of flaky business models fueled by debt. This time the spending is being done by companies with some of the best balance sheets on the planet and this is their mission critical infrastructure. We have CapEx from cloud customers going 4050% this year. Oracle just reported last week their CapEx will double in the next fiscal year. And #3 valuation, I know this talk has had a very strong run, but if you look at the broader S&P 500, it's trading at about two times earnings growth. But if you look at NVIDIA, trading at anywhere between 35 to 40 times is actually less than one times earnings growth. So by some measures, it is still quite inexpensive. The the creation of AI and this drive to go after you've compared this to kind of the the same thing as the creation of FIRE. You want to explain what you mean? Yeah, what I mean by that, And obviously that's somewhat more extreme version of it. But what I really wanted to convey is that this is a new and important and exciting and a fundamental tool that has been given to the technology industry because AI has been with us for a long time, right? If you look at Google Translate, if you look at the original version of Siri, and we have had AI for a long time. But what is different with this AI is that it understands context that it can be used to, you know, create a extract a lot of insights from data that can be invoiced, video, text format, and then help to create from all that data. That's why we call it generative AI, not just conventional AI. And I think it has the power to transform a lot of industries and ways we have just not seen before. And secondly, this new form of AI is coming at a time when traditional semiconductor technology, which was driven by Moore's Law, has come to a standstill. So we needed to upgrade the infrastructure anyway. And I think AI is giving us that next opportunity to upgrade the infrastructure using this new form of accelerated computing. So I do think it's a structurally a new tool. Every industry is looking at it, trying to adopt it to extract insights from a lot of data that is just sitting there doing nothing right now. But I think that this tool that in those insights can be driven and that's why it's the start of a new industry. NVIDIA has such a huge lead over any of its competitors. I guess the question is, can anybody catch them and if so, who? Yeah, I think customers will have choices. If we look at this 100 billion or so market for hardware this year, NVIDIA has about 80 plus percent of that. We think custom chips are another 1015% of that. And then the remaining 5%, right, you will see a lot of smaller players, whether it is it is AMD, whether it is Intel, where the, you know whether there's a lot of startups. But we do expect NVIDIA to maintain its 80 plus percent market share for the reason that this is the norm in technology. If you look at any part of technology, right, whether it's social, e-commerce, operating systems, right, you will see that the leader keeps 80% of the market, right. But you still have a long tail of competitors. And I think we think it's going to be no different in AI where the leader, you know, as long as they continue to execute, which we have every confidence they will, we think they should be able to keep over 80% of this market, which in our estimation could triple over the next few years.

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