For much of last year, many investors feared the onset of a recession. But the decision by the Federal Reserve Bank to pause its interest rate increases has many on Wall Street now calling for a so-called soft landing -- or getting inflation under control without causing a recession.
There's more good news. While the Nasdaq Composite has already gained 43% so far this year (as of market close on Thursday), history suggests there's more to come. Over the past 51 years, in the year following a market recovery, the Nasdaq has surged an additional 19% on average, which suggests there's likely more gains to come.
Leading the pack this year have been the so-called Magnificent Seven stocks. Each has deep ties to artificial intelligence (AI) and all have outpaced the broader market by a country mile:
- Nvidia (NVDA -0.39%): Up 235%
- Meta Platforms: Up 194%
- Tesla: Up 107%
- Amazon: Up 83%
- Microsoft: Up 59%
- Alphabet: Up 56%
- Apple: Up 50%
Wall Street rarely agrees on anything, but most market watchers agree that one of the Magnificent Seven is best situated to profit from the rapid adoption of AI: Nvidia. While the stock has already soared so far this year, the evidence suggests it could outperform over the longer term -- and the stock isn't as expensive as you might think.
Image source: Getty Images.
AI is just one piece of a far bigger puzzle
It's worth stepping back for a minute to look at the big picture. While AI represents a massive opportunity for Nvidia, it's far from the only one. The company first introduced the modern graphics processing unit (GPU) 25 years ago, which transformed the video game market by rendering lifelike images, replacing the boxy figures gamers had come to expect. Nvidia has parlayed that early success into a dominant share of the discrete desktop GPU space, recently controlling more than 80% of the market, according to Jon Peddie Research (via Tom's Hardware).
Over the years, the secret to Nvidia's success has been its ability to adapt its technology to new and lucrative use cases. This all hinges on parallel processing, or the ability to break up massive computing jobs into smaller, more manageable pieces.
The company soon discovered that the ability to process a multitude of complex mathematical calculations could be used in other computationally demanding use cases. Nvidia quickly developed solutions for a wide range of these applications, including cloud computing, data centers, autonomous driving, and most recently AI. Furthermore, by relentlessly improving its technology and including software that makes its processors work even more efficiently, Nvidia created an economic moat that it maintains to this day.
The ability to pivot and constantly develop new use cases has helped fuel the stock's relentless climb higher, having gained 12,380% over the past 10 years. That's also why AI is just the latest in a long line of breakthroughs fostered by Nvidia's technology and why its processors are the gold standard in a wide variety of these use cases.
The numbers tell the tale
You need only examine Nvidia's results to understand the degree of its importance in the advent of AI. In Nvidia's fiscal 2024 third quarter (ended Oct. 29), the company generated record revenue of $18.1 billion, up 206% year over year, while its diluted earnings per share of $3.71 surged 1,274%. Investors shouldn't expect results of that magnitude to continue, as the results are skewed by last year's downturn. But it does help illustrate the accelerating demand for Nvidia's groundbreaking AI chips.
The company expects the current tidal wave of growth to continue. For its upcoming fiscal fourth quarter, Nvidia is forecasting record revenue of $20 billion at the midpoint of its guidance, which would represent an increase of 230% year over year. Management left no doubt that AI was behind its bullish outlook.
Estimates vary widely, so there's simply no way to know for sure how big the market for AI will ultimately grow, yet even the more conservative estimates are eye-catching. The Generative AI market could grow to $1.3 trillion by 2032, achieving a compound annual growth rate (CAGR) of 42%, according to Bloomberg Intelligence.
Nvidia was already the undisputed leader in machine learning (an earlier branch of AI) with 95% of that market, according to New Street Research.
As the leading provider of AI solutions of all kinds, Nvidia has the most to gain from this secular tailwind.
Growing in all directions
AI isn't the only potential growth driver.
There has been an uncharacteristic growth slump in the gaming market, the result of economic headwinds, but they are abating. The global gaming GPU market is expected increase from $2.7 billion this year to $11.7 billion by 2028, a CAGR of 34%, according to market researcher Mordor Intelligence. As the industry leader, Nvidia will also ride this wave higher.
The adoption of cloud computing shows no signs of slowing, as businesses shift an increasing number of workloads to the cloud. All that information has to go somewhere, which is fueling greater investment in data centers -- and the need for increased capacity and performance will only grow as more companies integrate AI into their operations. This, in turn, will fuel a data center upgrade cycle. Estimates suggest that Nvidia has a 95% share of the GPUs used by the data center market, according to CFRA Research analyst Angelo Zino.
Furthermore, the data center market will continue expanding and is expected to grow from $263 billion last year to $603 billion by 2030, a CAGR of 11%, according to Prescient and Strategic Intelligence Market Research. This helps illustrate another large and profitable opportunity for Nvidia.
As the leading provider of processing solutions for gaming, cloud computing, data centers, and AI, the future is bright for Nvidia -- and its investors.
It isn't as expensive as you think
Let's talk about the elephant in the room, Nvidia's valuation. The stock is currently selling for 65 times earnings and 27 times sales, which might seem outrageous at first glance. But it fails to capture an important factor: growth. As previously mentioned, the company has generated two successive quarters of triple-digit growth, which skews those metrics to the upside, making the stock look extraordinarily expensive.
However, the highly appropriate price/earnings-to-growth ratio (PEG ratio) -- which takes that growth into account -- is less than 1, compared to more than 2 for the S&P 500, which shows how cheap the stock really is.
There's little question the accelerating demand for generative AI will continue well into the future. Add to that Nvidia's dominant position in gaming, data centers, and machine learning, and it's clear Nvidia is the Magnificent Seven stock to buy in 2024 if you can only buy one.
