Nvidia (NVDA 3.35%) invented the graphics processing unit (GPU) in 1999. That innovation has since revolutionized the media and entertainment industry, bringing sensational visual effects to video games, film, and professional design applications. The company's GPUs have also become the gold standard in accelerating complex data center workloads, like artificial intelligence (AI) and analytics.
Nvidia created tremendous value for shareholders as those events unfolded. Its stock has soared 43,670% since 2000, compounding at 28.6% annually. At that pace, $5,000 invested in the company 24 years ago would be worth $2.1 million today. Similar returns in the future are beyond the realm of possibility, but Nvidia stock could still be a rewarding investment. Here's why.
Nvidia finished the year with fantastic fourth-quarter results
Nvidia was the best-performing stock in the S&P 500 last year, but Wall Street was on edge when the company announced fourth-quarter results last week. Some analysts expected the stock to pullback significantly following the report, simply because expectations were so lofty. But the company delivered another drop-the-mic performance, beating estimates on the top and bottom lines, and the stock moved 10% higher on the news.
Fourth-quarter revenue increased 265% over the prior year to $22.1 billion on continued momentum in the data center segment, driven by frenzied demand for AI chips. Nvidia also reported strong growth in professional visualization, which comprises chips and software purpose-built for digital-content creation. On the bottom line, non-GAAP net income soared 486% from the prior year to $5.16 per diluted share as pricing power supported a 10-percentage-point expansion in gross margin.
The infographic below provides more detail on fourth-quarter revenue growth across Nvidia's four primary business segments.
Infographic by Author. Shown above is revenue across Nvidia's four largest business segments in the fourth quarter of fiscal 2024, which ended Jan. 28, 2024. OEM and other revenue has been excluded because they accounted for less than 1% of total revenue.
Nvidia is the engine of the AI revolution
Following its invention of the graphics processing unit (GPU) in 1999, Nvidia pressed its advantage with CUDA in 2006, a programming model that opened its GPUs to general purpose computing and laid the foundation for its data center business. The company also started building software libraries that allowed its GPUs to accelerate workloads, like scientific computing, data analytics, and machine learning.
Two decades later, Nvidia GPUs have become the gold standard in accelerated computing. The company holds 98% market share in data center GPUs, over 95% market share in workstation graphics processors, and over 80% market share in AI chips, according to analysts. Furthermore, the company has extended its ability to monetize graphics and AI by branching into subscription software and cloud services.
Omniverse Cloud brings together hardware, software, and services that support 3D application development and physically accurate simulation, which is useful in training machine-learning models for autonomous robots and self-driving cars. Similarly, DGX Cloud brings together hardware, software, and services that support AI application development across a range of use cases, from retail and customer service to logistics and healthcare.
Nvidia has also expanded its data center hardware portfolio with high-performance networking equipment and central processing units. That makes Nvidia a full-stack accelerated computing company, meaning its products address every layer of the computing stack, from infrastructure to software and services.
That full-stack strategy affords the company an incredible competitive advantage, according to CFRA analyst Angelo Zino. It not only creates new monetization opportunities with existing customers, but also reduces friction for potential customers. The upshot is that Nvidia has become the engine of the AI revolution, and its capacity for innovation should keep the company at the forefront of AI computing for years to come.
The price of Nvidia stock is surprisingly tolerable
Nvidia is ideally positioned to benefit as businesses invest in AI. Argus analyst Jim Kelleher recently wrote, "Nvidia stands out, in our view, not only because it participates in so many parts of the dynamic AI economy, but because it has synthesized its offerings into a first-of-its-kind AI-as-a-service delivered through the cloud."
With that in mind, the graphics processor market is forecast to grow at 28% annually through 2030, while AI spending is projected to increase at 37% annually during the same period. That gives Nvidia a good shot at 30% annual sales growth through the end of the decade, which implies similar (or slightly faster) earnings growth.
Indeed, Wall Street expects the company to grow earnings per share at 35% annually over the next five years. That consensus estimate makes its current valuation of 66 times earnings seem tolerable.
Nvidia is arguably cheaper than many other popular AI stocks, including Amazon and Microsoft. To elaborate, the company currently has a PEG ratio -- the price-to-earnings multiple divided by projected earnings growth rate -- of 1.9, while Amazon and Microsoft have PEG ratios of 2.5.
That said, much depends on how quickly Nvidia grows earnings in the future. Its share price would almost certainly plummet if it fails to keep pace with consensus estimates. Investors who are comfortable with that risk should consider buying a small position in Nvidia stock today, especially as part of a basket of AI stocks.
