If you put $10,000 in Nvidia (NVDA +1.73%) stock 10 years ago, you would have $2.74 million today -- a life-changing return of over 27,400%. Over that time frame, the company has experienced several boom-and-bust cycles based on demand for its graphics processing units (GPUs). Let's dig deeper into what the next decade could have in store.
A history of boom and bust cycles
Historically, Nvidia has experienced several boom-and-bust cycles based on macroeconomic factors and industry dynamics outside its control. Soon after its initial public offering (IPO) in 1999, the company enjoyed explosive growth based on demand for its GPUs for personal computers and video game consoles like Microsoft's Xbox.
NASDAQ: NVDA
Key Data Points
These are now somewhat mature and highly cyclical markets because they rely on nonessential discretionary spending that can be cut in challenging economic conditions. But by 2010, Nvidia was rescued by a brand-new industry: cryptocurrency mining.
Blockchain platforms like Bitcoin (and previously Ethereum) run on a system called proof-of-work, where transactions are validated, and new blocks created by solving complex computational puzzles (mining). Nvidia's consumer GPUs were ideal for these tasks, leading to booming sales for much of the 2010s and some of the 2020s.
But now, Nvidia has finally gotten its big break with generative artificial intelligence (AI), an opportunity so massive, it has made the company's other business verticals practically irrelevant.
Nvidia over the next 10 years
For better or worse, Nvidia has become almost a pure play on data center AI hardware, with its other segments fading into irrelevance. In the first quarter, data center sales represented 87% of the company's $26 billion in revenue, while the once-core gaming and PC segment (which includes cryptocurrency mining rigs) has fallen to just 10%.
Nvidia's poor diversification will likely worsen because the data center segment is growing significantly faster than its other businesses. This dynamic makes the company vulnerable to a potential slowdown in demand for AI chips, which is a significant risk over the coming decade.
Image source: Getty Images.
Even if the overall industry meets analysts' lofty expectations (Bloomberg expects generative AI to be worth $1.3 trillion by 2032), there may eventually be chip overcapacity as data centers accumulate massive stockpiles of GPUs and feel less need to update to the latest versions. And like in Nvidia's previous boom-and-bust cycles, used chips could erode the market for its new products, leading to lower pricing power and margins.
That said, Nvidia is a company that constantly reinvents itself. Few would have expected the video game chipmaker to dominate cryptocurrency mining and eventually generative AI. In the future, new markets such as self-driving car technology, robotics, or warehouse automation could reignite demand for Nvidia's products and rediversify its customer base.
Is Nvidia still a buy?
Nvidia stock still looks capable of outperforming the S&P 500 over the next 10 years -- especially as the AI industry expands out of simple chatbots into more advanced-use cases. That said, the stock has become incredibly risky in the near term because of its overreliance on data center GPUs and the threat of overcapacity in its market.
Investors who buy now should be ready to ride through a potential correction. But the better idea might be to hold and wait for more information.
