Meta’s increased capex could boost Nvidia’s revenue, but sustained growth requires monitoring investment cycles closely.
- Meta’s Q1 earnings, though exceeding expectations, disappointed the market due to guidance and increased capex, impacting Meta stock negatively.
- Nvidia stands to benefit from Meta’s augmented capex, particularly in AI infrastructure, potentially bolstering Nvidia’s revenue.
- Despite short-term gains, sustained growth relies on monitoring the cyclical nature of investments and their long-term impact on Nvidia’s value generation
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Recently, Meta (META) reported its Q1 earnings which, despite being above expectations, disappointed the market due to its guidance and capex outlook. Following the earnings release, Meta stock suffered a drop of over 10%.
While the company’s higher capex is a drag on free cash flow and hasn’t pleased the market, one can reasonably speculate that Nvidia might benefit from it.
Let’s delve into how Nvidia could benefit and assess the sustainability of Meta’s demand.
Meta’s Capex Means Nvidia’s Revenue
Previously, Meta had projected its 2024 capex to range between $30-37 billion, which was subsequently increased to $35-40 billion. This increase is aimed at supporting Meta’s AI roadmap with significant investments in infrastructure.
At the beginning of the year, Zuckerberg stated plans to acquire up to 350k Nvidia H100 GPUs for their next-generation AI development, specifically targeting AGI (Artificial General Intelligence).
This would amount to $10.5 billion in Nvidia GPUs. Zuckerberg also mentioned in the Q1 earnings call that, as Meta scales capex and energy expenses for AI, they’ll continue focusing on operating the rest of the company efficiently.
“As we’re scaling capex and energy expenses for AI, we’ll continue focusing on operating the rest of our company efficiently” Mark Zuckerberg, Meta’s CEO.
For Nvidia, what matters more than this year’s spending increase is its potential long-term sustainability. Meta also addressed this, mentioning that they expect capex to continue increasing next year.
Nvidia’s Long-Term Demand
As discussed in another article (“Nvidia Stock: The Path to 3 Trillion Market Cap”), expecting Nvidia to continue growing robustly in the coming years is plausible. There are strong growth estimates in this space, such as Grand View Research’s projection of a 23.5% CAGR expansion in the global data center accelerator market size until 2030.
Meanwhile, Research and Markets estimate that the Global Data Center Accelerators markets could reach $351 billion by 2030, with a CAGR of 34.2% between 2022-2030.
This is not to mention Nvidia’s own outlook, estimating a long-term available market opportunity of around $1 trillion, not only in Data Centers (~$300 billion) but also in Autonomous Machines, Gaming, and other sectors.
With Meta signaling that significant capex is still to come (with prospects of an increase next year), short and medium-term projections for Nvidia seem even more feasible. If the bulk of the capex for AI infrastructure hasn’t been spent by the tech behemoths yet, there are still avenues for growth in new industries and even sovereign AI.
While I’m optimistic about this technology’s growth and its reflection on Nvidia’s financials, it’s not reasonable to perpetuate this growth ad infinitum. Much of Nvidia’s market value lies in its “perpetuity” when conducting valuation by DCF.
The Bottom Line
In summary, I believe Meta’s announcement could be positive for Nvidia, not necessarily due to the ~$5 billion in capex but because of the prospects for continued AI investment, signaling strong momentum not only from Meta but also from other major tech companies.
That said, it’s still worth investigating and monitoring how cyclical these investments might be through earnings calls in the coming quarters and complementary research. While not a concern for now (given the current red-hot demand cycle), it could be a crucial factor for Nvidia’s and other semiconductor chips’ value generation in a few years.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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