The “magnificent seven” when it comes to stocks is a term created by investment personality Jim Cramer that encompasses the seven stocks that he believes dominate the market. They are:
- Nvidia (NVDA 2.33%)
This group had a phenomenal year, with the “worst” (if you can even call it a “worst” performer) being Apple, whose shares are up about 48% this year. At the other end of the spectrum is Nvidia, which increased by more than 200%.
Such a performance is unusual, but can Nvidia defend its title as a top 7 stock in 2024?
Supercomputers for AI are driving huge demand for Nvidia’s GPUs
Nvidia’s rise in 2023 can be attributed to one trend: artificial intelligence (AI). Its graphics processing units (GPUs) are the best on the market and are in high demand as companies race to expand their AI computing capabilities.
When consumers buy GPUs, they are only buying one to power a computer. But when commercial customers buy GPUs to equip their data centers, they buy thousands. For example, Tesla’s Dojo computer, which the company uses to train its full self-driving program (FSD), uses 10,000 H100 GPUs. Although the actual cost of the H100 GPU is not publicly known, they can be purchased used for around $30,000 each. From there, it’s pretty easy to calculate that Tesla, along with Nvidia, spent around $300 million equipping its Dojo computer.
Now, when you extend that spending to other tech giants looking to finish their supercomputers and to cloud computing companies building data centers so others can rent out the computing power, it’s pretty obvious why Nvidia had such a good year in 2023 .
In the third quarter of fiscal 2024, Nvidia’s revenue increased 206% to $18.12 billion compared to the same quarter last year. That’s a lot of GPUs sold, and it’s just getting started. In the fourth quarter, management expects sales of $20 billion.
But given Nvidia’s stellar growth in 2023, the question remains: Can the company sustain its gains in 2024?
Nvidia is a cyclical company
My biggest concern with Nvidia is that their GPUs are not a subscription product. For example, Tesla spent a lot of money building its computer; Does it need to spend another $300 million to make another one? This probably won’t be the case for a while as far as Nvidia’s long-term prospects are concerned.
If everyone rushes to build their AI computers now, will any company be left standing in a few years? That’s my biggest problem with investing in Nvidia, and there’s no obvious answer until demand goes away (or not).
However, Nvidia’s stock price requires demand to continue and grow as the company carries a premium valuation of 62 times earnings. Given the stock’s valuation, Nvidia needs to continue growing at warp speed or the stock could bottom out. Additionally, if sales decline due to worsening demand, Nvidia’s stock will likely fall as well.
While it’s unknown whether demand for its GPUs will remain strong in 2024, there will be headwinds at some point. Therefore, I would be shocked if Nvidia was the best-performing Magnificent Seven stock in 2024.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, 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 at 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.