Nvidia (NVDA -0.27%) investors have been on a roller coaster in recent years. First, the COVID-19 pandemic led its stock to skyrocket thanks to a surge in consumer spending on tech. Then, macroeconomic headwinds caused the company's stock to plunge 50% in 2022. This year, Wall Street has grown bullish over Nvidia again, boosting its stock 85% since Jan. 1. Investors have rallied over the company's lucrative prospects in artificial intelligence (AI).
The volatility of Nvidia's stock in recent years highlights the importance of holding for the long term. For instance, despite recent fluctuations, the company's stock has risen 380% in the last five years.
The projected growth of markets such as AI and cloud computing makes now an excellent time to learn more about this leading chipmaker. After all, Nvidia is likely to play a crucial role in their development. Here are three things about Nvidia that smart investors know.
1. Nvidia is powering ChatGPT
OpenAI stunned the tech world last November with the launch of ChatGPT, an advanced chatbot capable of producing human-like dialogue. The success of ChatGPT has triggered an AI race, where countless companies have pivoted their businesses to AI development, increasing demand for powerful hardware like Nvidia's graphics processing units (GPUs).
GPUs are necessary to run and develop AI software, and Nvidia has a promising position as the industry leader. Its dominating role in the market has led it to become the primary supplier of GPUs to ChatGPT, which has been a major driver in Nvidia's recent stock growth.
According to TrendForce, ChatGPT required about 20,000 GPUs in 2020. That figure is expected to soon rise to 30,000 as the platform readies for commercialization, with Nvidia in a prime position to significantly profit from the increase in demand. Meanwhile, competing platforms currently under development could also turn to Nvidia for GPU power.
2. A lucrative partnership with Amazon
In addition to AI development, Nvidia is profiting from the steadily growing cloud market. For over a decade, the company has partnered with cloud giant Amazon Web Services (AWS). The collaboration has seen Nvidia utilize its GPUs to power data centers worldwide, hosting AWS.
Amazon Web Services holds a 34% market share in the cloud market, with Nvidia again seeking an industry leader to maximize its profits in a developing market, as it has done with ChatGPT.
A Grand View Research report shows the cloud market hit $484 billion in 2022 and is projected to expand at a compound annual growth rate of 14% through 2030. The pandemic boosted the industry, with countless companies moving their businesses online to suit hybrid working styles. However, AI development seems to have taken the reins now, with the technology capable of enhancing different facets of cloud services. Nvidia's strong position in both markets allows stock investors to back both technologies.
Moreover, Nvidia's cloud and AI businesses now make up the majority of its income through its data center segment, accounting for 56% of the company's $27 billion in revenue in fiscal 2022. As a result, the segment's 41% year-over-year revenue growth is a positive sign of the chipmaker's future.
3. Nvidia's stock isn't as expensive as it looks
Nvidia's rally in 2023 has made its stock look overpriced when considering its forward price-to-earnings ratio, which sits at about 60. However, the semiconductor company's stock remains 23% below its all-time high of $333 in November 2021, suggesting it has more room to rise.
The chipmaker got to its record high stock price as a leader in consumer PC components, thanks to a rise in people building custom computers for activities such as gaming and crypto mining. However, since then, Nvidia has pivoted toward less consumer-reliant industries, diversifying its business and making it less susceptible to economic declines.
As a result, Nvidia's future stock growth will likely rely on the development of AI and cloud computing, which will only continue to advance. So alongside stock growth of more than 8,000% in the last decade, Nvidia is a no-brainer buy right now. The company has a history of stellar growth and solid positions in markets building the future.
