Over the last five years, Nvidia (NVDA 1.58%) investors have been on a roller coaster ride as shares careened from boom to bust and back. And while the chipmaker ended the period up a whopping 562%, the ride was far from easy. Let's explore what Nvidia's next five years could look like and decide if now is a good time to bet on the stock.
A new period of super-growth and competition
Analysts at Price Waterhouse Coopers expect artificial intelligence (AI) to contribute $15.7 trillion to the global economy by 2030 as it is used across industries to boost productivity, stimulate consumer demand and drive innovation. Over the next five years, Nvidia is poised to benefit massively from this megatrend. While the company doesn't offer consumer-facing generative AI applications, it boasts an impressive 80% market share in AI-capable GPU chips such as the A100 and H100, which train and power applications like ChatGPT.
The AI impacts are already showing in Nvidia's operational results. Revenue jumped 101% year over year to $13.5 billion, based on a surge in data center chip sales for generative AI applications. Investors should expect the company to report a high top-line growth rate for the next few years as AI usage becomes more entrenched in the economy. With that said, it won't necessarily be an easy road ahead.
Competitors like Amazon and Advanced Micro Devices are working on their own AI-capable chips that can compete with Nvidia. And the company will have to work hard to protect its economic moat against new entrants. Rising competition could lead to margin pressure, and Nvidia will have to rely on research and development to maintain its lead.
The weaker segments could eventually recover
Over the last few quarters, Nvidia has faced significant pressure in its gaming segment, where it sells graphics processing units (GPUs) often used for video game PCs and cryptocurrency mining. This business has faced consumer pressures like inflation and rising interest rates, which lower peoples' spending power and encourage them to shop for cheaper (often used) chips instead of Nvidia's latest offerings.
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However, this segment might have finally bottomed. And in the second quarter, it began showing signs of recovery, with sales up 22% to $2.49 billion. Over the next five years, it looks likely that microeconomic challenges will ease further, creating a pathway for Nvidia's highly cyclical gaming segment to exit from its current slump. The company could also boost growth by implementing AI technology.
In the second quarter, the company released its Nvidia Cloud Engine for Games, a customizable AI service to help game developers build and deploy advanced speech and animation within their projects. This unique venture could help boost growth and diversify Nvidia's gaming segment revenue outside graphics hardware.
Nvidia may grow into its high valuation
After surging by a whopping 225% year to date, Nvidia's stock has undoubtedly become quite expensive. With a trailing 12-month price-to-earnings (P/E) multiple of 109, Nvidia's shares dwarf the S&P 500 average of 25. But Nvidia's GPU business is also surging, so the company looks set to grow into its valuation, which means its financial performance should catch up to its stock price. When looking at earnings projected 12 months into the future), Nvidia's (forward) P/E drops to just 42, which is not unreasonable for a rapidly expanding industry leader with a strong moat.
Investors should not expect Nvidia's stock price to maintain an extreme growth rate over the next five years, or mirror its performance over last 12 months, because much of the company's business expansion is already priced-in. Instead, the stock will probably move slower as its valuation returns to historical norms. However, the chipmaker's current valuation may not fully account for its long term potential -- especially if the artificial intelligence boom lives up to analysts' expectations, which means the stock still has ample room for growth and possibly continue to outperform broader benchmarks in the near term. While we just don't yet know how big the AI opportunity will be, Nvidia will almost certainly play a big role by virtue of its industry-leading hardware.
