Nvidia’s fat margins are Google and AMD’s opportunity

Subscribe to enjoy similar stories. The AI revolution has created a unique and high-quality problem for Nvidia: The chip maker makes too much money. Nvidia has fallen under scrutiny over the past month as investors have come to worry about the sustainability of blowout artificial-intelligence spending.

But another fear surfaced last week with reports that Google is looking to enter the AI chip market by selling the chip it designed in-house, known as a tensor processing unit or TPU, for its own computing needs. Nvidia’s stock price has picked up some ground this week, but the shares are still down 12% since the company peaked at a $5 trillion market cap in late October. The Nasdaq composite has lost about 2% in that same time.

The recent decline has made the world’s most valuable company look cheap. Nvidia’s stock now trades around 26 times projected earnings for the next four quarters—close to its lowest multiple over the past five years, according to FactSet data. But that ratio is based on earnings expected over the next year that could come under pressure if stronger competition forces Nvidia to lower its prices.

A haircut to earnings would still leave Nvidia more profitable than most other chip companies, but the stock wouldn’t be quite the bargain it seems to be, despite the company’s still-commanding lead in the lucrative AI-chip market. How lucrative? Nvidia has generated a little over $110 billion in operating income over the last four quarters. That equates to about 59 cents of operating profit for every dollar of revenue, far above what any other chip company on the PHLX Semiconductor Index commanded over the same period, according to data from S&P Global Market Intelligence.