If you have paid any attention to the stock market this year, you would have found it impossible to ignore semiconductor giant Nvidia (NVDA -0.16%). Its stock has delivered a blockbuster return of 189% on the back of substantial -- and largely unexpected -- sales growth driven by its artificial intelligence (AI) chips.
But the broader stock market is in the throes of a pullback right now, with the Nasdaq-100 technology index sinking by 7.3% since the start of August. Many of the stocks that led the market higher this year have also declined, with Nvidia now trading 17% below its all-time high.
I'll share three reasons why investors might wish they took this opportunity to buy Nvidia stock for the long term.
1. Artificial intelligence will be a long-term opportunity for Nvidia
Many experts have issued forecasts for the financial impact of AI on businesses and the economy, and even at the low end, they are mind-blowingly large:
- Goldman Sachs estimates generative AI could add $7 trillion to the global economy over the next 10 years.
- Research firm McKinsey & Company expects 70% of companies to use AI by 2030, adding $13 trillion to the global economy.
- Cathie Wood's Ark Investment Management projects a whopping $200 trillion windfall for the global economy by 2030, thanks to AI's ability to make the workforce significantly more productive.
Right now, Nvidia is the grand facilitator of the AI industry. It has an estimated 90% share in the market for AI data center chips, which means the majority of businesses trying to develop AI software applications will be doing so using Nvidia's hardware.
Major providers of cloud services like Amazon Web Services and Microsoft Azure are installing Nvidia's latest H100 graphics processing chips (GPUs) into their data centers, so their customers have the computing power to develop AI for their needs. Similarly, Nvidia's hardware is at the foundation of start-ups like ChatGPT developer OpenAI.
Nvidia CEO Jensen Huang believes there is more than $1 trillion worth of existing data center infrastructure that needs upgrading to support accelerated computing and AI, so this shift is still in the early stages.
Still, in the recent fiscal 2024 second quarter (ended July 30), Nvidia's data center revenue soared by a whopping 171% year over year, to $10.6 billion. The company's guidance suggests growth could be just as explosive in the current third quarter, the results of which will be released in November.
2. Autonomous driving could contribute billions of dollars to Nvidia's revenue
Artificial intelligence is already laying the groundwork for several offshoot industries, and one of them is autonomous driving. Self-driving vehicles were science fiction not so long ago, but many automotive manufacturers are preparing to roll out the technology within the next couple of years.
Again, Nvidia has positioned itself as a key facilitator in that transition. The company's DRIVE platform is an end-to-end hardware and software solution for carmakers looking to install autonomous driving technology into their new vehicles.
In the fiscal 2024 second quarter, Nvidia's automotive segment generated $253 million in revenue, which represented just 2% of the company's total revenue. So, why am I bothering to mention it? Because DRIVE has amassed a sales pipeline worth over $11 billion that will be realized between now and 2028. That revenue will be drawn from more than 40 different car manufacturers, including industry giants like Mercedes Benz and Tata Motors' Jaguar and Land Rover.
That list will probably grow longer in the coming years because it's going to be far cheaper (and faster) for manufacturers to license autonomous technology from Nvidia than to develop it in-house. For instance, Tesla's in-house full self-driving project has collected 500 million miles of real-world data, and yet it still hasn't been released to the wider public.
It's possible that as Nvidia's data center revenue matures in the coming years, the company's automotive segment could become a key supplementary growth driver contributing billions of dollars to the top line.
Image source: Getty Images.
3. Valuation -- yes, you read that correctly
By almost every traditional metric, Nvidia stock is extremely expensive right now even after the recent dip. Based on the company's $32.6 billion in trailing-12-month revenue and its $1.02 trillion market capitalization, its stock currently trades at a price-to-sales (P/S) ratio of 31.2. By comparison, semiconductor industry competitor Advanced Micro Devices trades at a P/S ratio of just 7.5.
Similarly, based on Nvidia's $5.25 in trailing-12-month earnings per share and its current stock price of $412.10, it currently trades at a price-to-earnings (P/E) ratio of 78.5. That's more than twice as expensive as the Nasdaq-100 technology index, which trades at a P/E ratio of 29.9.
So, are investors crazy for buying Nvidia stock here? Not necessarily. Growth rates are critically important when determining the fair value of a company. See, if investors assess Wall Street's estimates for Nvidia's next fiscal year (fiscal 2025, ending Jan. 30, 2025), its stock arguably looks cheap.
Analysts expect the company's fiscal 2025 revenue to come in at $78.1 billion, which places its stock at a forward P/S ratio of just 13. They also expect Nvidia's earnings per share to come in at $16.11 -- more than triple where it is today -- which places its stock at a forward P/E ratio of just 25.5!
Therefore, as long as investors take a long-term approach to Nvidia, its current stock price might look like a bargain when they look back on this moment a few years from now.
