Tom Lee is an accomplished equity research analyst and serves as a managing partner at Fundstrat Global Advisors. A couple of months ago, Lee provided an update on his outlook on chip megastar Nvidia (NVDA +4.39%).
Nvidia's run over the last two years is nothing short of unprecedented. Excitement surrounding artificial intelligence (AI) has led to a generational surge in demand for Nvidia's data center services and graphics processing unit (GPU) chipsets. While it's natural to think that Nvidia's momentum is going to slow down at some point, Lee sees things differently -- calling for tenfold growth from current levels over the next decade.
Below, I'm going to explore a bull and bear case surrounding Lee's 10x forecast on Nvidia. After carefully considering all angles, I hope investors can come away with more knowledge surrounding both the catalysts and headwinds that could impact Nvidia over the next decade.
NASDAQ: NVDA
Key Data Points
The bull case for Nvidia
If you've been following my articles during the AI boom, you'll know that I see Nov. 30, 2022 as the unofficial start date of the AI revolution. Why so specific? Because that's the day OpenAI released ChatGPT to the masses and sparked a worldwide phenomenon for the ages. In many ways, I view the launch of ChatGPT akin to the early days of Facebook and the birth of social media.
NVDA Revenue (Quarterly) data by YCharts
Just look at the slope of the lines illustrating Nvidia's revenue, net income, and free cash flow over the last two years (with Nov. 30, 2022 being the start date depicted above). Nvidia's accelerated growth stems from unparalleled demand for its GPU chipsets. When I say "unparalleled" I'm not exaggerating -- Nvidia has acquired an estimated 90% of the GPU market, and there are many reasons to believe the company's momentum is just beginning.
Industry research suggests that investments in AI infrastructure are going to exceed trillions of dollars over the next several years. Nvidia's new Blackwell GPU architecture, combined with its successor product dubbed Rubin (slotted for a 2026 launch), positions the company well to acquire incremental market share as AI investments continue to scale.
The pace at which Nvidia is innovating, combined with its strong financial profile underscored by consistently rising profits, makes it difficult to buy into a pessimistic narrative over the company. Nevertheless, smart investors know that there are more stones to turn over before betting the house on Nvidia.
The bear case for Nvidia
One of the reasons Nvidia's GPU sales have skyrocketed stems from how the company's technology stack actually works. You see, Nvidia's GPUs (hardware) run on the company's compute unified device architecture (CUDA) software. This tight integration makes it extremely difficult for businesses to leverage products and services from other chipmakers.
As I expressed in this piece from a few months ago, the Department of Justice (DOJ) could very well decide to investigate Nvidia's business practices given the company is arguably becoming a monopoly. Translation: The government could force Nvidia to loosen its grip and make the CUDA system more malleable so that it works seamlessly with GPU hardware developed by other companies. Should this occur, Nvidia's growth rate would decelerate and the company's market share would likely begin to shrink.
Admittedly, the idea above is rooted more in speculation than reality. However, a more realistic headwind Nvidia is facing comes from competition.
Nvidia's largest customers include cloud hyperscalers such as Microsoft, Alphabet, and Amazon, as well as "Magnificent Seven" cohorts Meta Platforms and Tesla. While increasing investments in AI infrastructure can be a good thing for Nvidia, it's important for investors to understand that this dynamic could also be a detriment for the company. Each of the companies referenced above is either investing in its own homegrown chips or is known to be supplementing its Nvidia GPUs with those offered by lower-cost alternatives -- namely from Advanced Micro Devices.
Image source: Getty Images.
The bottom line
At the end of the day, I think that it is highly unlikely that Nvidia's valuation will rise 10x over the next decade. While I remain bullish on the company overall, I simply struggle to see how the company's growth can continue generating multibagger-style returns over the next several years.
To me, Nvidia is still a rock-solid stock to own for exposure to the AI industry, but I think calling for tenfold growth in the face of direct and internal competition plus the potential for government intervention is a bit of an overzealous call.
