If you bought $1,000 of Nvidia (NVDA 4.43%) stock 10 years ago, you would have roughly $2.3 million today, a potentially life-changing return of 23,000%. While the company has probably become too large to deliver such rapid gains in the future, the next decade could bring many exciting opportunities as artificial intelligence (AI) technology develops.
Let's discuss what this could mean for Nvidia and long-term investors.
Will artificial intelligence live up to its expectations?
Nvidia has been so successful because it sells the graphics processing units (GPUs) other tech companies need to build and train generative AI algorithms or make their data centers capable of handling these new workloads. This position means Nvidia benefits from the expansion of the industry as a whole, and the future looks bright.
NASDAQ: NVDA
Key Data Points
Generative AI is a subset of machine learning designed to create new content based on user inputs and training data. Consulting group McKinsey & Company believes the technology will improve enough to perform at a level comparable to the median human by decade-end. If true, Nvidia could enjoy a virtually limitless addressable market as AI technology expands into new use cases by replacing skilled labor.
Investors should also remember that generative AI is one of several AI niches. Others include robotics and neural networks, which can be used for applications like self-driving cars. Over the next 10 years, these other markets could help Nvidia diversify its hardware business outside of just data center GPUs. In the first quarter, automotive and robotics represented just $329 million of Nvidia's $26 billion in sales.
Some potential near-term risks
The rise of generative AI has striking similarities with the internet in the 1990s and 2000s. While internet technology eventually transformed the global economy, the trajectory wasn't as smooth as some investors expected. During the dot-com bubble, Cisco Systems benefited from demand for networking hardware like routers and switches. And its market cap soared to over half a trillion dollars in March 2000.
Image source: Getty Images.
Eventually, the bubble burst, and Cisco lost 88% of its value by 2002. Now, over two decades later, Cisco's market cap is just $187 billion, which means it has never recovered to its bubble-era price tag, even though the internet, as a whole, is clearly a financial success.
Nvidia faces some of the same potential challenges Cisco faced two decades ago. And even if generative AI reaches analysts' lofty projections, that will be no guarantee that Nvidia's equity will hold on to its $2.7 trillion market capitalization.
That being said, with a trailing price-to-earnings (P/E) multiple of 64 and a forward P/E of just 42, Nvidia is relatively affordable compared to its bottom-line growth rate (first-quarter profits surged 628% year over year to $14.88 billion). The market seems to already be pricing in some of the near-term risks, which could limit Nvidia's potential downside.
Buying at the top of a mountain?
From a fundamental perspective, Nvidia stock is still a great deal. Revenue and earnings are skyrocketing with a reasonable valuation. And over the next 10 years, the company's GPUs could find more use cases in automotive automation and robotics, unlocking additional growth and much-needed diversification to its revenue streams.
That being said, there is a negative gut feeling that comes from buying a stock that has already risen so far so fast, especially when you remember the lessons of other tech giants like Cisco Systems. While Nvidia clearly has spectacular long-term potential, investors should tread with caution and make sure to diversify their portfolios.
