2023 has been great so far for growth stock investors, who have seen top companies like Nvidia (NVDA 3.46%) recapture much of the previous year's losses. But with shares of the semiconductor leader still down 15% from an all-time high of $333, some investors are still in the red. Let's explore two reasons why the recovery might be far from over.
Nvidia's economic moat remains strong
Nvidia's stock performed poorly in 2022, reflecting the macroeconomic challenges it faced in the period. Fourth-quarter revenue dropped 21% to $6.05 billion because of weakness in the gaming segment. Demand for consumer graphics cards is cyclical because they are non-essential luxury products that can be easily substituted with older models when money is tight. And right now, inflation is eroding gamers' purchasing power.
Nvidia's gaming chips are also used for cryptocurrency mining. And when this market tanked, it created a surplus of GPUs in the market -- leaving gamers spoiled for choice when upgrading their rigs.
With all that said, like all cycles, this one could eventually reverse. And Nvidia's strong economic moat ensures that a temporary downturn doesn't destroy its long-term thesis. The company still controls a whopping 78% of the discrete GPU market, and it maintains its lead through technological innovation.
In late 2022, the company released its RTX 40 line of graphics cards, which deliver substantial performance and efficiency improvements over its predecessor, RTX 30.
AI is a transformational opportunity
While gaming graphics are still the core of Nvidia's business, management seemed to brush over it in the company's most recent earnings call. Why? Because artificial intelligence (AI) might be the bigger story. According to data cited by Statista, the $100 billion AI market could surge 20-fold to almost $20 trillion by the end of the decade. And Nvidia is positioned to capture a chunk of this eyewatering expansion.
Just as in gaming, Nvidia has a near-monopoly on the market for GPUs advanced enough to be used for machine learning, with a market share of 95%, according to New Street Research. About 10,000 of Nvidia's A100 chips were used to train OpenAI's ChatGPT model. And investors should expect demand to grow as more AI platforms are developed.
Image source: Getty Images.
The technology also has applications for Nvidia's data center business, where it stores and interprets large volumes of information for enterprise clients. To further explore this opportunity, the company has developed an AI supercomputer called DGX Cloud designed to give enterprises access to the infrastructure needed to build advanced applications without having to buy and run the GPUs themselves.
An undeniably high valuation
With Nvidia's forward price-to-earnings (P/E) multiple of 60, a lot of success is already priced into its valuation, which could make investors feel late to the party. But you get what you pay for in the stock market, and Nvidia's rock-solid economic moat in such an advanced industry could translate into years of sustainable growth and profits.
