Nvidia (NVDA 1.27%) made history earlier this year by becoming the first chipmaker to reach a trillion-dollar valuation. That explosive growth was mainly driven by the rapid expansion of the artificial intelligence (AI) market, which drove data center operators to purchase more of Nvidia's high-end GPUs to process complex AI tasks.
Nvidia's stock eventually closed at an all-time high of $493.51 on Aug. 31, which boosted its market cap to $1.2 trillion. But by the final week of October, Nvidia briefly slipped below the $1 trillion mark. It has since bounced back to about $1.1 trillion as of this writing, but can Nvidia stay in the elite 12-zero club throughout 2024?
Nvidia CEO Jensen Huang. Image source: Nvidia.
How rapidly is Nvidia growing?
Nvidia's data center revenue increased by triple-digit percentages on a year-over-year basis in the first half of fiscal 2024 (which ends next January). That segment accounted for more than three-quarters of its revenue in its latest quarter. Its gaming business, which suffered a severe post-pandemic slowdown alongside the broader PC market, also finally grew again and ended its four-quarter streak of year-over-year revenue declines.
Analysts expect Nvidia's revenue and adjusted earnings to soar 92% and 205%, respectively, in fiscal 2024. The analysts project its revenue and adjusted earnings will rise another 51% and 58%, respectively, in fiscal 2025. Those breakneck growth rates make Nvidia the market's fastest-growing blue-chip semiconductor company by a wide margin.
Nvidia's stock initially seemed pricey before the AI market caught on fire, but its rapid growth has quickly compressed its forward valuation. At $450 per share, Nvidia trades at just 27 times forward earnings. For reference, its smaller rival Advanced Micro Devices, which is growing at a much slower rate, trades at 30 times forward earnings.
Why has Nvidia's rally stalled out?
That valuation suggests it's still a great time to buy Nvidia's stock, but three major challenges are driving away the bulls.
First and foremost, Nvidia's business in China could be derailed by the Biden administration's tightening export curbs on AI chips. Last year, the U.S. Department of Commerce barred Nvidia from selling its top-tier A100 and H100 data center chips to Chinese customers. Nvidia initially offset that impact by exporting its lower-end A800 and H800 chips to China, but a new round of export curbs will close that loophole. As a result, about $5 billion of the company's chip orders to China currently remain in limbo. Nvidia will likely recover from that setback by directing those chips to other markets, but the ultimate fate of its business in China -- which accounted for 21% of revenue in fiscal 2023 -- remains unclear.
Second, a growing number of big tech companies -- including Alphabet's Google, Meta Platforms, Amazon, and Microsoft -- are developing their own first-party AI accelerator chips to reduce their dependence on Nvidia. Even OpenAI, the creator of ChatGPT, has reportedly been developing its own AI chips. Those efforts could gradually undermine Nvidia's dominance of the AI market.
Finally, there's a creeping fear that the AI boom will lead to a painful bust. Many tech companies are rushing to upgrade their platforms with generative AI tools, but some of those efforts could flop and poison the well. If the AI bubble pops, Nvidia's growth spurt could abruptly end.
Will Nvidia stay in the trillion-dollar club next year?
Those challenges seem daunting, but I don't think they'll disrupt Nvidia's business next year. The market's demand for Nvidia's data center GPUs is still outstripping its supply, so the export curbs against China should free up more of its chips for other countries. Meanwhile, it will likely take years for tech giants like Google and Microsoft to develop AI chips that can match the performance of Nvidia's chips. Until that happens, it will simply be cheaper to buy Nvidia's best-in-breed GPUs.
The AI market might eventually peak, but the bubble probably won't burst anytime soon because many companies have only recently started to ramp up their AI projects. That's why Precedence Research estimates the global AI market will still expand at a compound annual growth rate (CAGR) of 19% from 2023 to 2032. If Nvidia merely keeps pace with that market over the next decade, its stock could still have a lot of upside potential.
Therefore, I don't think Nvidia will drop out of the trillion-dollar club next year. It might not replicate its 235% rally over the past 12 months, but I think it could stabilize as it addresses the near-term concerns about China and the broader AI market.
