Following the 2022 launch of OpenAI's ChatGPT, generative artificial intelligence (AI) has taken Wall Street by storm. Few companies have benefited more than Nvidia (NVDA +2.59%) -- the chipmaker that creates the hardware needed to make this new technology possible. An explosive second-quarter earnings report suggests its boom is far from over.
Nvidia's revenue soared 122% year over year to $30 billion, compared to analysts' expectations of $28.7 billion. Growth was driven by demand for advanced graphics processing units (GPUs) like the H200, which helps train and run AI algorithms. The company's bottom line also remains buoyant, with net income soaring 168% to $16.6 billion.
How much longer can Nvidia's rally continue? Let's dig deeper into what the next 12 months may have in store for this technology leader.
NASDAQ: NVDA
Key Data Points
The bear case
Nvidia is becoming an increasingly polarizing stock. While few would deny its operational momentum, we can question the AI industry buying up its pricy hardware. So far, things aren't squaring up.
While consumer-facing large language models (LLMs) are fun to play with, they seem far from a transformational tech megatrend. And even if these algorithms could become smart enough to make a big splash, their monetization potential remains unclear because of competition from free, open-source options like Meta's Llama or Elon Musk's Grok.
Analysts at Goldman Sachs (GS +0.45%) highlight these alarming dynamics. In a June report, they suggest that the roughly $1 trillion tech giants invested in AI capital expenditures might never pay off. If Nvidia's clients don't start making money, they will eventually stop buying the company's expensive chips, leading to sales declines and margin erosion.
With a trailing price-to-earnings (P/E) multiple of 59 compared to the Nasdaq-100 average of 32, Nvidia's valuation prices in significant future expectations. And if these don't materialize, shares could crash.
The bull case
In the best-case scenario, Nvidia's long-term rally is only just beginning. According to analysts at Bloomberg, the generative AI industry could expand at a compound annual growth rate (CAGR) of 42% to $1.3 trillion by 2032 as investment shifts from training infrastructure to consumer use cases like software and advertising. If this is true, Nvidia's current sales are only a drop in the bucket compared to its long-term potential.
Management is also pushing back against the suggestion that its clients won't profit from their AI investments.
Image source: Getty Images.
Nvidia CFO Colette Kress claims cloud computing providers are seeing an "immediate and strong return" on AI investment. On the earnings call, Kress claimed that $1 spent on Nvidia hardware could generate $5 over the next four years. That number rises to $7 for the company's newest products, like the HDX H200 AI accelerator. However, while robust demand suggests Nvidia's cloud clients see value in its hardware, Kress's claims might be a little misleading.
These companies still serve the infrastructure side of the AI market. They buy Nvidia GPUs to rent out to AI start-ups. If the consumer-facing start-ups can't monetize the technology, they will eventually stop renting GPUs and the cloud service providers will stop buying them.
Is Nvidia stock a buy?
Nvidia is a great company because it sells products the market wants. And its stock will probably continue soaring in the near term. However, the foundations of long-term demand for AI GPU products are shaky.
This hype-driven industry could be in for a reckoning over the next 12 months if the software side of the opportunity doesn't start showing more progress toward monetization. Investors should consider taking profits or avoiding Nvidia stock until more information becomes available.
