Nvidia (NVDA -1.35%) stock's sharp rally is showing no signs of cooling off. The semiconductor bellwether has rewarded investors handsomely in 2023 with gains of nearly 89% so far, and it looks like the hype around artificial intelligence (AI) could help it sustain its terrific momentum in the stock market.

The addressable market for Nvidia's graphics processing units (GPUs) could jump substantially thanks to the growing deployment of AI applications, giving the company's fast-growing data center business a big boost.

That won't be surprising since OpenAI's popular chatbot ChatGPT, which is a generative AI application, reportedly uses 10,000 Nvidia GPUs. That number is expected to cross 30,000 as OpenAI scales up ChatGPT to meet the growing demand for chatbots.

Analyst Dylan Patel of semiconductor research firm SemiAnalysis points out that booming demand for graphics cards for AI applications is creating a shortage of Nvidia's GPUs. CEO Jensen Huang said last month that the company is witnessing an acceleration in demand thanks to the popularity of generative AI.

So should investors who have missed the Nvidia gravy train so far in 2023 buy the stock now in anticipation of more upside? Let's find out.

AI will drive terrific demand for Nvidia

Market research firm Research Dive forecasts that demand for AI accelerators such as central processing units (CPUs), GPUs, data processing units, and other chips could grow at an annual pace of 39% through 2031, generating a whopping $332 billion in annual revenue at the end of that forecast period. Nvidia is in a solid position to take advantage of this huge opportunity.

New Street Research estimates that Nvidia controls a whopping 95% of GPUs used for machine learning. The research firm points out that its A100 GPU, which is priced at $10,000, has become the go-to chip for powering AI workloads in data centers and supercomputers. Not surprisingly, OpenAI used thousands of A100 GPUs to train ChatGPT, and it is not the only one using Nvidia's chips to power its AI applications.

Stability AI, which is known for the Stable Diffusion generative AI platform that can turn text into images, is also a customer for Nvidia's A100 GPUs. Stability AI was using 32 of these GPUs last year, a number that ballooned to 5,400 in February 2023. With the generative AI market expected to clock 21% annual growth over the next decade, increasing from just under $9 billion last year to more than $126 billion in 2033, sales of GPUs meant for AI workloads should boom.

This should help Nvidia maintain terrific growth in the data center business. The company's data center revenue has increased from just below $3 billion in 2019 to $15 billion in 2022. The segment produced 55% of Nvidia's total revenue last fiscal year, growing 41% over the prior year. This healthy growth was the reason Nvidia's total revenue remained flat year over year at $27 billion in fiscal 2023 despite steep declines in the gaming and professional visualization businesses.

And now, the company is expanding the reach of its AI platform through a cloud-based offering known as DGX Cloud that will allow companies to develop generative AI applications without investing a lot of money in hardware. That puts Nvidia in a position to take advantage of another rapidly growing market. A cloud-based AI GPU service means that companies won't have to spend huge amounts of money on setting up the required infrastructure, which they can simply rent from Nvidia.

Essentially, Nvidia is providing its GPUs as a service. Global Market Insights estimates that the GPU-as-a-service market could be worth over $80 billion by 2032, up from just $5 billion last year, clocking 30% annual growth through the next decade. So, the data center business will continue to move the needle in a big way for the company and drive growth even as it faces challenges in the personal computer (PC) market.

Is the stock worth buying now?

At 155 times trailing earnings, Nvidia is richly valued. The price-to-sales ratio of 25 further tells us how expensive Nvidia stock is right now following its tremendous rally in 2023.

But a forward price-to-earnings ratio of 60 highlights a huge improvement in the bottom line. That's not surprising given the impressive pace at which Nvidia's earnings could grow from last fiscal year's figure of $3.34 per share.

NVDA EPS Estimates for Current Fiscal Year Chart

NVDA EPS estimates for current fiscal year data by YCharts.

It is worth noting that Nvidia's top-line growth is also expected to accelerate in fiscal 2024 and 2025.

NVDA Revenue Estimates for Current Fiscal Year Chart

NVDA revenue estimates for current fiscal year data by YCharts.

It won't be surprising to see Nvidia clock faster growth than Wall Street is looking for thanks to the massive opportunity in AI and data centers. So investors seeking to take advantage of the AI boom -- and who are willing to pay a rich multiple for a dominant player in a multibillion-dollar market that's growing rapidly -- could go long on Nvidia before it becomes more expensive.

Investors with a lower appetite for risk could get a chance to buy the stock at a relatively cheaper valuation if the headwinds in the PC market continue to weigh on its growth. However, they shouldn't forget that the data center business is now bigger than gaming, and the rapid growth of the former could be enough to offset the PC weakness and send the stock higher. In simpler words, Nvidia stock's hot rally seems here to stay.