There's no denying that artificial intelligence (AI) has gone viral over the past year or so, with graphics processing units (GPUs) by Nvidia (NVDA -0.70%) fueling the fire. In recent weeks, however, the stock has stalled, and investors are wondering what's to come.
One Wall Street analyst thinks investors are overthinking it.
Leading the AI boom
Melius Research analyst Ben Reitzes reiterated his buy rating on Nvidia stock while raising his price target to $1,125. That represents potential gains for investors of 28% over the coming year compared to the stock's closing price on Monday. The analyst points to expanding capital expenditures by the "Big Three" cloud providers and other big tech companies as evidence that Nvidia stock has further to run.
The analyst has a point. Microsoft and Alphabet each reported their first calendar quarter results last week, and both announced plans to increase capex spending to support cloud growth fueled by generative AI. At the same time, Meta Platforms said it plans to boost spending by several billion dollars for the coming year to "support our AI road map."
Reitzes references the current AI "gold rush," saying the large cloud providers "are all spending ~20% more on chips than we thought over the next few years." He goes on to say they're "spending like crazy" now, hoping they can "monetize like crazy" later. "Sometimes a no-brainer is a no-brainer," he wrote.
If you don't believe it, consider this: Nvidia is the leading provider of the GPUs used in data center processing where much of AI systems reside, with an estimated 95% market share. That dominance was evident in Nvidia's fiscal 2024 fourth quarter (ended Jan. 28), as its data center revenue of $18.4 billion soared 409% year over year, driven by the build-out of data centers to support AI.
While Nvidia stock is a bit pricey, selling for 35 times forward earnings, the company's triple-digit growth and market dominance make it worth every penny.
