You can't spell growth without AI these days. I'm kidding, of course, but there's at least some truth in the tongue-in-cheek statement.
AI provided a massive tailwind for the top growth stocks last year. These high-flying stocks are collectively known as the "Magnificent Seven": Google parent Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia (NVDA +1.13%), and Tesla. The momentum is continuing in 2024 for several of them.
The level of magnificence for these stocks varies, though. Which Magnificent Seven stock is poised for the most spectacular growth? Here's the hands-down winner -- at least over the next few years.
"The tipping point of a new computing era"
All of the Magnificent Seven stocks could have tremendous long-term prospects. Alphabet, Amazon, and Microsoft should enjoy strong growth as organizations move to the cloud to run AI apps. Apple has opportunities in augmented reality, services, and more. Tesla, Nvidia, Alphabet's Waymo unit, Amazon's Zoox, and potentially Apple could make a lot of money in the future with the advent of autonomous vehicles.
However, one company stands head and shoulders above the rest. Nvidia made this fact abundantly clear with its latest quarterly update. It wasn't Nvidia's fourth-quarter numbers themselves, although they were great. Instead, it's what the company's executives said about the future.
NASDAQ: NVDA
Key Data Points
Nvidia CFO Colette Kress set the tone early in the fourth-quarter call by stating, "The world has reached the tipping point of a new computing era." She explained that this new era is due to the rapid transition to accelerated computing needed to power what Nvidia calls "AI factories" -- data centers specifically built for AI systems.
Sure, the rest of the Magnificent Seven companies will likely benefit from this new computing era, too. But nearly all of them use Nvidia's graphics processing units (GPUs). At least for now, the only way they'll succeed in this new age is by fueling Nvidia's success.
Kress name-dropped several of the other six members of the Magnificent Seven in her comments. She noted that cloud providers such as Microsoft generated more than half of Nvidia's data center revenue in Q4.
She said that Nvidia is working with multiple leaders in large language models (LLMs), including Google and Microsoft (along with Microsoft's partner, OpenAI). Kress mentioned that Meta's use of AI (powered by Nvidia's GPUs) helped boost revenue in its latest quarter. She referred to a recent announcement that Amazon will use Nvidia DGX Cloud for its Amazon Web Services cloud platform. Although Kress didn't refer to Tesla by name, she did point out that the company is working to help several companies use AI in autonomous driving.
How much growth could Nvidia realistically deliver?
Nvidia expects that revenue for the first quarter of its fiscal year 2025 will be $24 billion. This amount reflects 234% year-over-year growth and nearly 9% sequential growth. But how much growth can Nvidia realistically deliver going forward?
Like most companies, Nvidia doesn't provide details on its longer-term outlook. However, CEO Jensen Huang stated in the Q4 call, "[F]undamentally, the conditions are excellent for continued growth in calendar '24 to calendar '25 and beyond." He cited two major trends as the reasons for his optimism.
First, Huang echoed Kress' comments about the transition to accelerated computing. This opportunity is massive all by itself. Kress mentioned that the current installed base of data center infrastructure is valued at roughly $1 trillion. And most, if not all, of it is quickly migrating to accelerated computing.
The second trend that Huang referenced is generative AI. He maintained that "a whole new industry is being formed" because of generative AI, adding that it is driving Nvidia's growth.
Huang believes that these two trends will cause the world's data center infrastructure installed base to double over the next five years. He predicted that the annual market opportunity from this explosion would be measured in "the hundreds of billions" of dollars. No company is better positioned to capitalize on this opportunity right now than Nvidia.
What could get in the way?
It's possible, of course, that Huang and Kress are seeing Nvidia's future with rose-colored glasses and are way too optimistic about the future. If accelerated computing and generative AI don't deliver the tailwinds they expect, Nvidia's growth won't be as great as anticipated.
Nvidia's success is also attracting competition. Advanced Micro Devices, for example, argues that its newest AI chips are as good as Nvidia's. "Magnificent Seven" members Meta and Microsoft are two large customers that plan to use AMD's chips to reduce their reliance on Nvidia. Several of Nvidia's big customers are developing their own AI chips as well.
Before Nvidia's blowout Q4 results, JPMorgan Chase analysts warned that supply could eventually exceed demand. While Kress stated in the quarterly call that even with supply increasing, the demand remains greater than supply. However, that could change down the road.
Finally, Nvidia could deliver the massive sales growth that seems to be on the way, but its stock still underperforms. How? A tremendous amount of growth is already baked into Nvidia's share price.
Still, the future for Nvidia appears to be very bright at this point. It arguably is the most magnificent of the Magnificent Seven.
