In the generative artificial intelligence (AI) megatrend, there's arguably no bigger winner than Nvidia (NVDA 0.03%) -- the chipmaker that produces the hardware needed to train and run these applications. The company's "picks and shovels" approach has made it a Wall Street darling, with shares up by a whopping 78% in 2024.
But should investors keep piling into the stock? Let's dig deeper to find out what the next five years could have in store.
Nvidia's rally still makes sense
At first glance, the company's parabolic rally over the last two years might look like a classic speculative bubble, but this doesn't seem to be the case. The company's fundamentals justify its stock-price performance, and stellar fourth-quarter results highlight its ongoing momentum.
Nvidia's revenue jumped 265% to $22.1 billion, based on sales of advanced graphics processing units (GPUs) used by data center clients to build and run their AI infrastructure. This is expensive hardware -- with prices for Nvidia's flagship h100 hovering around $40,000 per unit on third-party marketplaces, according to CNBC. And the changing product mix has boosted the company's gross margin, which rose 12.7 points to 76% in the period.
Despite operating in such a lucrative industry, Nvidia faces limited competition. Rival AMD has been relatively slow to ramp up sales of its competing MI300X AI chips. And while big customers like Alphabet, Amazon, and Tesla are investing in proprietary GPUs tailored to their specific workloads, Nvidia is also targeting this market through its own custom chips, which could take advantage of its economies of scale and manufacturing expertise to dominate the $30 billion opportunity.
What could the next five years have in store?
Nvidia is the right company at the right time to benefit tremendously from the rapid growth of generative AI -- a market Bloomberg expects to be worth $1.3 trillion by 2032. If AI reaches these lofty expectations, Nvidia should continue posting market-beating growth and possibly become the most valuable company in the world. With a market cap of $2.2 trillion, it's already in third place behind Microsoft and Apple.
Image source: Getty Images.
Even in a best-case scenario, Nvidia's revenue growth will probably slow down as the industry consolidates and clients stockpile the hardware needed for their AI ambitions. But Nvidia can keep the competition at bay through its relentless innovation. The chipmaker continues to release new products, such as its GB200 (expected to ship this year), which delivers 30X the inference for large language models (LLMs), compared to the company's current flagship GPU, the h100.
Inference refers to the running of generative AI applications. Faster chips like the GB200 could help clients operate ever larger and more complex LLMs while fulfilling user search queries faster. With 25x the energy efficiency of the H100, the new chip can also make data center operations more profitable. There's plenty of incentive for existing clients to continually upgrade to Nvidia's latest products to stay competitive.
Could anything go wrong?
While Nvidia looks like the perfect company, investors shouldn't overlook potential risk factors that could develop over the coming years. For starters, generative AI businesses will need to start generating profits to justify the continued purchase of Nvidia's expensive hardware.
In February, the Verge reported that it expects 2024 to be a year of reckoning for the industry, as high expectations will need to translate into cash flow and earnings. It remains to be seen how this will play out. But Nvidia's modest valuation of just 37 times forward earnings seems to price in potential risks, and the stock is still a buy.
