While it's still undoubtedly the most watched stock in tech, some of the heat surrounding Nvidia (NVDA +5.93%) seems to have cooled over the last few weeks. At this point, it's not enough for the company to post great numbers. It's not even enough to handily beat Wall Street's sky-high expectations. For Nvidia to really move the needle, it has to blow them out of the water.
NASDAQ: NVDA
Key Data Points
Although many investors may be disappointed with the nearly 8% slide from before it reported earnings through Dec. 10, short-term price movements are of little importance in the scheme of things. So, zooming out, where will Nvidia stock be in five years?
The company is still delivering
Maybe it's old news at this point, but it bears repeating. The artificial intelligence (AI) arena is enormous, growing rapidly, and is likely to dominate markets for years to come. You don't have to buy in completely to the loftiest promises of the industry -- and there are many -- to see that the technology has immense potential. PwC -- one of the "Big Four" accounting firms -- anticipates AI could contribute $15.7 trillion to the global economy by 2030.
Nvidia is at the center of it all, and it's not just through its chips. As new industries boom, they're led by companies with real vision that help to show what's possible. Thus far, Nvidia is that company. Under founder and CEO Jensen Huang's leadership, Nvidia has remained ahead of the curve for years. That's the sort of intangible that doesn't show up in an earnings report.
Still, the tangibles matter too, and Nvidia continues to dominate there as well. The company's chips power the industry, and demand for its newest iteration, Blackwell, couldn't be stronger. With the rollout of Blackwell, Nvidia appears poised to continue the double-digit quarter-over-quarter growth of the last year.
The only real blemish in its Q3 guidance was the expectation for gross margin to decrease slightly over the course of the next year as Nvidia ramps production of Blackwell. It really is a nitpick, though -- Nvidia's gross margin last quarter was an incredible 74.6% and the company's CFO stated in the earnings call it would drop to the "low 70s" for a time before returning to the "mid 70s" later in the year.
Opportunities lie ahead, but so do a few hurdles
It's clear things are going about as well as they could at the moment. As investors look to the future, however, Nvidia faces some challenges.
On a more macro level, the question still looms over the industry of whether the return on investment is really worth it. While this question seems less potent than it may have a few months ago -- observers have seen some more evidence of real-world value -- skepticism hasn't gone away. Companies like Alphabet and Microsoft are spending record amounts -- more than $50 billion -- on capital expenditures this year, and most of that is going to AI infrastructure.
The industry is in the midst of an AI arms race and no one wants to be left behind, but shareholders of these companies can only stomach these spends for so long before a proven return is made clear. If this spending dries up, Nvidia's bottom line will suffer. I think the industry is quite a ways out from when this could prove to be a real threat, but keep an eye out to see if there's a shift in sentiment from leadership at these companies.
Zooming in, Nvidia faces competition from other chipmakers who want a piece of the action. With a new line of chips that almost rival Nvidia's offerings, AMD is the obvious No. 2, but it's far from the only threat.
At this point, however, Nvidia's hardware is still the best and while that's important, the company's real moat is CUDA, the software that accompanies its hardware. Nvidia has created an ecosystem in which using its products is easier and more efficient.
What the future holds
A lot can happen in five years, especially in the market, and while no one can predict the future, investors can make an educated guess. There will be some road bumps along the way, but I believe that Nvidia's place in the market, its technical advantages, and the vision of its leadership means that the company will continue to outperform the market during the next five years.
