The Nasdaq climbed to a new record high this year as investors piled into growth stocks, particularly those in the area of artificial intelligence (AI). This confirmed that the index was in a bull market, an investing environment favoring growth companies. And this momentum may just be getting started for two reasons.
First, the AI market is in its early days, with analysts predicting a double-digit compound annual growth rate over the next few years and a market surpassing $1 trillion by 2030. Many companies aim to get in on the AI story to either streamline their own operations or sell AI products and services to others.
The desired result? A boost in earnings. Investors today and in the coming years want to get in on these growth stories, too, and that could lift these companies' shares, along with the Nasdaq.
Second, if history is a guide, the Nasdaq will roar higher this year. Since 2009, in the three growth periods following years of declines, the Nasdaq has advanced for at least two years. And in that second year, it scored double-digit gains.
This year, the Nasdaq has pared its earlier increase and is now up about 4.5% year to date. If history is right, the index could soar from this level. Here's my top growth stock to buy before it does.
Image source: Getty Images.
Investing in AI
As I mentioned earlier, AI has been the key to stock market gains in recent times, and this trend is likely to continue, thanks to the long-term market outlook. Companies have a lot to gain by investing in AI today. This is terrific news for companies that produce the tools needed to unlock the power of this new technology. I'm talking about chip designers and makers of various key elements, like servers or workstations.
Many of these companies are set to benefit, but one that should score the biggest win is top chip designer Nvidia (NVDA 3.46%). The company's graphics processing units (GPU) have become the gold standard for training and inferencing, key tasks that power AI models so they can do their jobs of solving complex problems.
Nvidia's GPUs are mainly used by the video game industry. But seeing that their power to simultaneously process many tasks could be useful in other areas, Nvidia created CUDA, a parallel computing platform that allows GPUs to be used for general purposes, including AI. That created a huge shift at the company, and revenue linked to AI today is far surpassing revenue from the gaming business.
As a result, earnings have skyrocketed. In recent quarters, they've climbed in the triple digits, and over the past five years, earnings have advanced more than 900% to about $29 billion.
Nvidia's rival, Intel
Even though Nvidia holds 80% of today's AI chip market, plenty of rivals eagerly are attempting to take away market share. For example, Intel recently announced the upcoming launch of its Gaudi 3 AI accelerator, a chip that may outperform Nvidia's H100 on certain large language models.
Though others likely will take some market share, I don't see this as a threat to Nvidia or a movement that will weigh on earnings growth over the long run because the company continues to innovate and bring the most powerful chips to market first. It recently announced the release (later this year) of its Blackwell architecture, including six major innovations, such as the world's most powerful chip. A chip from a competitor today may outperform Nvidia's chips right now, but this probably won't be the case once Blackwell enters the scene.
Nvidia's earnings growth and access to talent offer the company the resources it needs to continue innovating and staying ahead.
Today, Nvidia shares, even after soaring 200% over the past year, trade for 32x forward earnings estimates -- which seems reasonable for a leader in such a high-growth market. And analysts predict 35% annual growth for the company over the coming five years.
All of this makes Nvidia look like a solid stock to buy right now. It also could help the Nasdaq roar higher this year and beyond.
