Nvidia (NVDA +1.90%) shares have skyrocketed in recent times, climbing 130% this year and more than 600% over the past three years. All of this is due to Nvidia's shift from a company serving primarily the video game industry to one that's critical to the development of artificial intelligence (AI) platforms.
The tech giant makes graphics processing units (GPUs), chips that traditionally have powered the speed and special effects involved in gaming -- and today these chips also are powering crucial AI tasks such as the training and inferencing of AI models. This has helped Nvidia's earnings to soar in the triple digits in recent quarters.
Some investors worry about buying Nvidia stock today, though, considering its major gains -- and the fact that rivals are attempting to grab market share. But I think there's still plenty of room for Nvidia to advance from an earnings and a share performance perspective, and that's why it's still my top AI stock. Let's check out the details.
Image source: Getty Images.
Why does Nvidia dominate the AI chip market?
First, we'll get started with a bit of background. It's important to understand why Nvidia is dominating the chip market. The company has the advantage of being first to market with its GPUs, but there's more to the picture than that. Nvidia's GPUs also happen to be the fastest, making them the gold standard for potential customers setting up an AI platform.
And Nvidia didn't just stop at the GPU. The company offers a wide range of products and services, including an entire software platform for enterprises, that helps customers hit the ground running with their AI projects. Finally, Nvidia has made its wares available through all public cloud services, making it very easy for potential customers to access what Nvidia has to offer.
Now, moving forward, I'm optimistic about Nvidia remaining ahead of the game, which will translate into more earnings growth and positive share price performance. There are two main reasons. The primary one has to do with Nvidia's focus on research and development. The company has set a goal of updating its GPUs on an annual basis, and if it meets that goal, it could very well always have the top-performing chip on the market.
For example, Intel recently said its new Gaudi 3 AI accelerator could outperform Nvidia's current top performer, the H100. However, Nvidia is in the process of launching an even more advanced chip, the H200, and later this year, Nvidia aims to release a whole new architecture called Blackwell, and its best-performing chip yet. This suggests that rivals may catch up with Nvidia's current top performer, but Nvidia likely will have another even better product ready to hit the market shortly thereafter.
NASDAQ: NVDA
Key Data Points
The early stages of AI
Second, right now, we're in the early stages of AI development, with the market set to grow beyond $1 trillion later this decade, according to analysts' forecasts. In this environment, Nvidia chief executive officer Jensen Huang is working on leading this development. An example is Huang's championing of sovereign AI, or the ability of countries to use their own data and infrastructure to create AI -- an AI tailored to their needs.
Huang spoke of the importance of this earlier in the year at the World Governments Summit in Dubai. And in Nvidia's recent earnings report, the company said it's beginning to generate revenue from sales of AI products and services for sovereign AI. It even predicts that its sovereign AI revenue -- from nothing last year -- may reach "the high single-digit billions" this year. So Nvidia is leading the way when it comes to finding new streams of AI revenue.
Nvidia's valuation
Now let's talk about valuation, the point that may lead investors to turn to a cheaper rival like Intel. Nvidia trades for 42 times forward earnings estimates, while Intel trades for only 27. Intel is a solid deal at these levels, and I would buy the stock for its potential to gain some AI market share and excel in its plans to open its chip manufacturing up to others.
But my top AI stock to own over time still is Nvidia for the reasons I've mentioned above, and these reasons make the stock well worth today's price. Yes, Nvidia has soared in recent years, but that doesn't mean the opportunity for gains is over -- if companies continue to develop AI projects as rapidly as in the recent past, Nvidia, and its investors, should continue to reap the rewards over time.
