If you had bought $1,000 worth of Nvidia (NVDA 1.45%) stock 10 years ago, you would have over $220,000 today -- a life-changing return that demonstrates the power of long-term investing. During that time, the company has frequently crashed, only to bounce back stronger than ever.
Past performance doesn't guarantee future returns, especially for a company already worth $2.93 trillion. But let's explore what the next decade could have in store for this iconic chipmaker and its shareholders.
A history of boom and bust cycles
Founded in 1993, Nvidia helped pioneer the graphics processing unit (GPU), a computer chip that excels at performing multiple tasks simultaneously. This hardware was a natural fit for the video game industry, where Nvidia quickly became a top supplier for early consoles and gaming computers when 3D rendering was new and exciting.
NASDAQ: NVDA
Key Data Points
By the 2010s and onward, GPUs found a new use case in cryptocurrency mining, leading to surging sales and even shortages for many of Nvidia's advanced consumer-focused hardware. After COVID, the company fell into a major slump as gaming and mining demand nosedived.
However, the launch of Open AI's ChatGPT in late 2022 gave the company a new lease on life. And now, its data center segment has overshadowed its formerly core businesses. In the fiscal second quarter, data center sales surged 154% year over year to $26.3 billion (88% of sales) on strong demand for enterprise GPUs. The gaming and PC segment only expanded by 16% to $2.9 billion (10% of sales).
How long will the AI boom last?
History tells us that Nvidia is a highly cyclical company, which means its business performance can follow macroeconomic or industry trends outside of management's control. And while the company has done a good job responding to surging AI hardware demand, it can't single-handedly keep the industry afloat if demand weakens. This is something long-term investors should watch out for.
While AI chatbots can be fun to play with, they have (so far) fallen short of the transformational megatrend promised. According to some analysts at Goldman Sachs, enterprise companies may never recoup the $1 trillion they are expected to spend on AI-enabling hardware over the next few years because of the technology's poor monetization potential due to computing costs and competition from free, open-source models.
Image source: Getty Images.
Nvidia's management disagrees. CFO Colette Kress claims that cloud providers could earn $5 over the next four years for every $1 spent on Nvidia hardware today. However, these enterprise customers are still on the infrastructure side of the industry. The real challenge will be monetizing consumer-facing AI software, which will need to generate profits to sustain demand for enabling hardware and infrastructure.
Nvidia over the next decade
While it is impossible to predict the future, generative AI hype could eventually fade, just like Nvidia's other boom cycles in gaming and cryptocurrency. The good news is that GPUs are a very adaptable technology platform. And they are already finding new use cases.
Over the next decade, investors should look for Nvidia to expand into highly synergistic spaces like self-driving cars, augmented reality, and warehouse robotics as the technology improves. The company's brand loyalty (driven by unique software solutions like CUDA) could help it dominate these new opportunities just like it did with generative AI.
From a valuation perspective, Nvidia's stock is not expensive at 43 times forward earnings, considering its triple-digit growth rate. However, investors should see this discount as a sign that the market is becoming less confident in Nvidia's ability to maintain current growth levels. Investors may want to wait until the AI bubble potentially deflates before taking a position in the stock.
