Why Nvidia Stock Popped on Tuesday

Shares of Nvidia (NVDA 6.98%) surged higher on Tuesday, jumping as much as 5.6%. As of 11:54 a.m. ET, the stock was still up 5.1%.

The catalyst that sent the chipmaker and artificial intelligence (AI) specialist higher was word that another AI start-up had raised billions of dollars, which is likely good news for Nvidia.

Heavy spending on AI

xAI, the AI start-up founded by Elon Musk, announced on Sunday it had raised $6 billion in its latest funding round. The company said in a blog post that the influx of cash would be used "to take xAI's first products to market, build advanced infrastructure, and accelerate the research and development of future technologies." In a subsequent post on X (formerly Twitter), Musk said the series B funding round valued xAI at $18 billion.

The company, which was founded last July, is the creator of Grok, the generative AI chatbot that competes with OpenAI's ChatGPT. Grok is available on X and is "modeled after the Hitchhiker's Guide to the Galaxy, so intended to answer almost anything and, far harder, even suggest what questions to ask!"

The principal beneficiary

So what does all this have to do with Nvidia? It's a signal that there's still plenty of appetite for continued investment in AI. Investors have been worried that the demand for AI could fall off, but this helps illustrate that's not the case.

Additionally, since xAI is working to rival ChatGPT, the underlying large language models will require plenty of computational horsepower to bring Grok up to par. Since the company isn't developing AI chips of its own, the vast majority of the processors will likely come courtesy of Nvidia -- the industry leader -- which will directly boost the company's sales.

This comes on the heels of Nvidia's blockbuster financial report and upcoming 10-for-1 stock split. For the fourth consecutive quarter, the company delivered triple-digit revenue and profit gains and is guiding for more. This helps illustrate the ongoing demand for AI.

Furthermore, at roughly 38 times forward earnings, Nvidia stock is still reasonably priced when viewed through the lens of its ongoing opportunity.