A debate is raging on Wall Street these days. One side insists that the S&P 500 is already poised for the next bull market, just 5% away from a new all-time high, while others insist the recovery will see a boost in speed could ultimately fail as economic headwinds persist.
Whatever turns out to be true, most agree that the emergence of artificial intelligence (AI) has had a profound impact on the technology landscape. Companies large and small are seeking to capitalize on recent advances that have the potential to deliver significant productivity gains.
There’s rarely a consensus on anything on Wall Street, but most market watchers agree that one company is best placed to reap the rewards of rapid AI adoption: Nvidia (NVDA 2.40%). Even though the stock has already gained around 220% so far in 2023, there are many reasons to believe that Nvidia still has a long and lucrative road ahead.
AI and more
It’s important to take a step back to realize that the AI does come from Nvidia latest Opportunity, it is far from the only one. The company first developed the graphics processing unit (GPU) to solve the problem of boxy images in video games and soon became the market leader.
However, Nvidia soon discovered that parallel processing – performing a variety of complicated mathematical calculations at the same time – could also be applied to other new technologies. The company quickly moved to combining hardware and software stacks for other compute-intensive applications, including data centers, cloud computing, high-performance computing and – of course – AI. This ability to adapt to new use cases is evident in the performance of Nvidia stock, which has risen 11,380% over the last decade.
You only need to look at Nvidia’s recent results to understand the magnitude of the current opportunity. For Nvidia’s third quarter of fiscal 2024 (ending October 29), the company has delivered record Revenue rose 206% to $18.1 billion, while diluted earnings per share rose 1,274% to $3.71. While the magnitude of the increases is partly due to comparisons with last year’s market collapse, it illustrates how cleverly Nvidia is exploiting the opportunities it presents.
The biggest contributor to the results was Nvidia’s data center segment – which includes artificial intelligence processors, cloud computing and data centers – which posted record revenue, rising 279% to $14.5 billion.
Management expects Nvidia’s growth spurt to continue. Management provides forecasts for the coming fourth quarter of the financial year record Revenue was $20 billion at the midpoint of its forecast, which would represent a 230% increase from a year earlier. Nvidia has been clear that strong and increasing demand for AI is driving the company’s robust growth.
No one knows exactly how big the market for AI will ultimately be, but even the most conservative estimates are staggering. Generative AI alone could grow at a compound annual growth rate (CAGR) of 42% and reach $1.3 trillion by 2032, according to data compiled by Bloomberg Intelligence.
By providing the technology that powers AI, Nvidia has secured its future.
The future looks bright for Nvidia
While AI is certainly Nvidia’s current growth driver, there are certainly others.
Even in the face of increasing competition, Nvidia remains the undisputed leader in the discrete desktop GPU market with a dominant share of 80%, according to data compiled by Jon Peddie Research (courtesy of Tom’s Hardware).
According to market research provider Mordor Intelligence, the gaming GPU market growth is expected to continue, increasing from $2.7 billion in 2023 to $11.7 billion in 2028, a CAGR of 34% . A rebound from last year’s slump will undoubtedly give Nvidia a boost.
Another trend driving Nvidia’s growth is digital transformation, as more companies move workloads to the cloud, requiring additional investments in data centers. Nvidia controls 95% of the data center market, according to CFRA Research analyst Angelo Zino. According to Prescient and Strategic Intelligence Market Research, the market opportunity is expected to grow from $263 billion in 2022 to $603 billion in 2030, a CAGR of 11%. This suggests that Nvidia is well-positioned to benefit from these long-term tailwinds.
Back to AI: Nvidia was already the clear market leader in machine learning solutions – the area of AI that deals with self-learning algorithms. According to New Street Research, Nvidia controls an estimated 95% of the market.
This combination of opportunity and market dominance shows that Nvidia has a long and potentially successful road ahead.
The fine print
I would be remiss if I didn’t address the 800 pound gorilla in the room. The rise in Nvidia’s share price this year has led to a corresponding increase in its valuation. The stock currently sells for 45 times expected earnings and 6 times next year’s sales. Although these metrics may seem egregious at first glance, they must be considered in context.
Nvidia has reported two consecutive quarters of record-breaking triple-digit revenue And Profit growth and expects a third. Performance of this magnitude certainly deserves a premium valuation, but in the end investors have to decide what multiple they are comfortable with. The stock is already down 10% from its recent peak (as of this writing), providing smart investors with a cheaper entry point.
Demand for AI is likely to continue from here. Combined with Nvidia’s other opportunities in the gaming and data center markets, I’d argue the stock is worth the premium – but it’s just not for everyone.