It's not much of an exaggeration to say there would be no generative artificial intelligence (AI) industry today without Nvidia (NVDA +4.30%). The chipmaker's hardware was crucial for training and running the first large language model (LLM), ChatGPT. And investors have been richly rewarded with shares up by over 360% over the previous three years (at the time of this writing).
But past performance doesn't guarantee future results, and Nvidia faces a slew of challenges and opportunities over the coming years. Let's explore how these factors could influence the performance of its stock.
NASDAQ: NVDA
Key Data Points
The chip business may soon lose its luster
Nvidia's AI hardware business is still booming. Fourth-quarter revenue jumped 78% year over year to $39.3 billion as it began the rollout of its new Blackwell-based AI chips used to run and train AI algorithms. However, while companies are still willing to spend big bucks for Nvidia's latest and greatest offerings, it is unclear how long this dynamic will last.
Generally, companies don't want to be overdependent on a single supplier because it can make them vulnerable to shortages or unfavorable pricing. And while Nvidia remains the preferred source for AI chips, companies are working hard to diversify their supply chains.
In February, ChatGPT maker OpenAI financed an in-house custom chip design with Taiwan Semiconductor Manufacturing that could hit mass production in 2026. Custom chips are designed for specific tasks, allowing them to operate with fewer unnecessary components (and potentially lower costs) than Nvidia's one-size-fits-all mass market solutions. If more companies decide to take this route, it could expose Nvidia's business to growth and margin pressures.
Potential new growth drivers?
Nvidia's clients aren't the only ones that need to take all their eggs out of one basket. The chipmaker is also alarmingly reliant on the generative AI opportunity. Data center sales (which include high-end AI chips) represented a whopping 88% ($115.2 billion) of 2024 sales. And the company will need to diversify over the coming years.
The company's automotive and robotics segment could play a role in this transition. While these businesses generated only $1.7 billion in 2024 sales, that's up by an impressive 55% from the previous year. Growth can accelerate as more companies invest in technologies like full self-driving vehicles -- an opportunity analysts at McKinsey & Company believe could be worth $300 billion to $400 billion in revenue by 2035.
Image source: Getty Images.
Don't forget about the gaming segment
While generative AI, robotics, and self-driving will probably dominate Nvidia's story over the next three years, investors shouldn't forget about the company's original mission: gaming. While this once-core business represented only 8.7% of Nvidia's revenue in 2024, it could get a boost from emerging technologies like augmented reality (AR) and virtual reality (VR), which will require vast amounts of graphics and image rendering.
While companies like Meta Platforms seem to have backed away from this opportunity in the near term, investors shouldn't underestimate its potential to take off among younger, more tech-savvy generations -- similar to how short-form video platforms arguably failed with millennials while booming with Gen Z. According to Wired Magazine, Meta's VR platform, Horizon Worlds, has been "taken over by children."
Eventually, these kids will grow into adults, pushing this nascent tech into the mainstream and creating an opportunity for Nvidia to sell more graphics cards. The company hasn't neglected this opportunity, investing in hardware and software solutions designed specifically for AR and VR.
Is Nvidia stock a buy?
Nvidia remains overdependent on the highly speculative and uncertain generative AI industry. And despite them being in the spotlight, it could take years for new opportunities like robotics, self-driving automotive, and virtual reality to help it diversify its revenue streams. While the stock's valuation remains reasonable at a forward price-to-earnings (P/E) multiple of 26, investors should wait on the sidelines until more information becomes available.
