With shares up a whopping 63% year to date, Nvidia (NVDA -3.89%) is still riding high on the artificial intelligence (AI) wave that boosted its shares by almost 240% in the last 12 months alone.
Stellar fourth-quarter results confirm that the company still enjoys significant near-term momentum. But what could the next five years have in store? Let's explore how new business verticals and valuation concerns could shape this iconic chipmaker's long-term trajectory.
Incredible fourth-quarter earnings
Nvidia's earnings have become big events for tech investors. Because of the chipmaker's outsized role in the burgeoning AI industry, its operational results can give valuable clues about the state of the sector as a whole. This time, the company didn't disappoint.
Fourth-quarter revenue jumped 265% year over year to $22.1 billion (up 22% sequentially) based on sales of its industry-leading graphics processing units (GPUs) for training and running AI applications.
Perhaps most importantly, Nvidia's gross margin of 76% (up 12% year over year) remains spectacularly high for a hardware company. The margins suggest the chipmaker still enjoys significant pricing power despite rising competition from rivals like Advanced Micro Devices, which recently entered the market with its new MI300 family of AI chips.
New business verticals can power continued growth
The AI chip industry may still be in its early stages, with some experts expecting it to be worth $400 billion by 2027. That said, Nvidia may need to diversify its strategy in this market. Over time, some of its largest data center customers may invest more in making proprietary chips instead of relying on its expensive third-party supplies. Management is taking several steps to get ahead of this potential challenge.
Image source: Getty Images.
In February, Nvidia announced a $30 billion investment into a new business unit focused on helping cloud computing clients make customized chips. This move could help Nvidia leverage its economies of scale to tackle the market for niche use cases that aren't well served by its general-purpose chips like the H100 and A100.
Nvidia is also betting on the software through its supercomputer DGX Cloud, designed to help clients create and run AI applications without going through the trouble of building their own infrastructure. Together, these diversification efforts can help the company maintain its extremely high growth rate in the face of rising competition.
Is the stock still affordable?
Nvidia is arguably one of the most compelling companies in the world from an investor standpoint. It has a rock-solid economic moat in a high-margin opportunity. And it is future-proofing its business by expanding into synergistic opportunities in custom chips and software. Most surprisingly, shares still trade at a reasonable valuation of just 33 times forward earnings -- slightly higher than the S&P 500 average of 28.
Nvidia's only serious risk seems to be if the AI industry fails to meet its lofty expectations. But there are no signs of that happening yet. Investors who purchased shares near the lows in 2023 may want to take some profits off the table. But the stock still looks like a long-term buy.
