Nvidia (NVDA +2.17%) has been one of the top stocks on the market in the past year, delivering outstanding gains of 142% to investors as of this writing, but a closer look at this semiconductor giant's recent stock price action suggests that its stunning rally may have finally come to a halt.
Shares of Nvidia hit a 52-week high on June 20. However, the stock has pulled back by 22% since then. Concerns have been raised about Nvidia's expensive valuation and its ability to sustain its eye-popping growth beyond next year. Additionally, it looks like not all tech giants have been looking to get their hands on Nvidia's chips to train artificial intelligence (AI) models.
NASDAQ: NVDA
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Apple, for instance, recently revealed that it used tensor processing units (TPUs) from Alphabet's Google division to train the large language model (LLM) powering its Apple Intelligence suite of AI features. That could have been a significant Nvidia contract, but AMD won the deal. Developments like this one seem to have weighed down Nvidia's stock lately.
But is this significant pullback an opportunity for savvy investors to buy this hot AI stock in anticipation that it could regain its mojo and deliver healthy gains once again in the coming year? Let's find out.
AI chip demand is still solid, and this bodes well for Nvidia
Analysts estimate that Nvidia's share of the AI data center graphics processing unit (GPU) market stands between 70% and 95%. This puts the company in a robust position to capitalize on the healthy demand for AI accelerators, both in the short and the long run. For instance, recent results from Nvidia's peer Advanced Micro Devices (AMD +0.74%) indicate that the hot demand for AI chips isn't going away.
AMD witnessed a terrific 115% year-over-year increase in its data center revenue to $2.8 billion in the second quarter of 2024. The company pointed out that this impressive increase was "primarily driven by the steep ramp of AMD Instinct GPU shipments," which are AI accelerators deployed in data centers.
It is also worth noting that AMD sold just over $1 billion worth of its MI300 AI GPU in the previous quarter. AMD now expects to sell $4.5 billion worth of data center GPUs in 2024 as compared to the previous guidance of $4 billion. That's also a nice bump from the $3.5 billion data center GPU forecast AMD issued in January this year. This Nvidia rival is enjoying robust success right now.
That's not the end of Nvidia's growth, though. Nvidia is a much bigger player than AMD in the data center GPU market, and it is also growing at a much faster pace. Nvidia sold $22.6 billion worth of data center chips in the first quarter of fiscal 2025, with its revenue from this segment rising a whopping 427% year over year.
There are two reasons why Nvidia clocked such phenomenal data center growth. First, we have seen that the company commands a dominant position in this market. Second, the size of the AI chip market is growing at a solid annual rate of 68%, according to market research firm TechNavio. The firm estimates that the AI chip market could grow by $390 billion between 2023 and 2028, which is why it won't be surprising to see Nvidia's business continue growing at a healthy pace in the future.
Investors can expect solid gains over the next year
UBS analyst Timothy Arcuri estimates that Nvidia could generate $204 billion in revenue in calendar year 2025 (which will coincide with the majority of its fiscal year 2026). For comparison, Nvidia is expected to deliver $120 billion in revenue in the current fiscal year 2025. So, Arcuri's estimate points toward a jump of 70% in Nvidia's revenue in the next fiscal year.
Arcuri's estimate is based on the healthy demand for Nvidia's new Blackwell generation of AI chips. The analyst points out that data center operators are placing huge orders for liquid-cooled server racks to house Nvidia's Blackwell chips. As a result, Nvidia could ship 69,000 Blackwell-based systems next year, generating $9 billion in revenue for every 5,000 such systems that it ships.
Additionally, Nvidia could generate $4.95 per share in earnings in 2025. Again, that's well above the $3.74 per share consensus estimate for fiscal 2026 (which coincides with 11 months of the calendar year 2025). Assuming Nvidia's fiscal 2026 earnings end up at the consensus estimate of $3.74 per share, its stock price could increase to $161 next year based on its forward earnings multiple of 43 (which represents a discount to the U.S. technology sector's earnings multiple of 45).
That would be a 50% increase from current levels. However, if Nvidia's earnings get close to Arcuri's estimate, investors could expect more upside from this semiconductor stock. That's why savvy investors could consider using Nvidia's pullback to buy more shares as its recent weakness could be temporary thanks to the massive AI opportunity it is sitting on.
