It's been a difficult year so far for Nvidia (NVDA +1.95%). Shares were down by more than 30% at one point, wiping more than $1 trillion off the company's valuation.
After a brief rebound, shares are now down by just 20% year to date. The stock isn't as cheap as it was a few weeks ago, but this is still an incredible chance for patient investors to lock in a great price for a business that should grow exponentially in the years to come. There's one reason in particular that should get investors very excited.
Why Nvidia is worth $2.7 trillion
Nvidia is one of the most valuable companies in the world for a reason. Its graphic processing units (GPUs) are some of the best in the world.
For AI applications in particular, its GPUs are considered the best in the world. They are crucial components that make the AI revolution possible, allowing companies to train and execute large models that require huge data sets to run properly.
Its next-gen Blackwell chips have performance benchmarks that few companies can match. But it's not just about raw performance. The hardware is supported by a software suite called Compute Unified Device Architecture (CUDA).
CUDA allows developers to customize Nvidia's GPUs to their specific uses, unlocking performance upgrades that make the company's GPUs even more attractive. And once a customer is using CUDA, it essentially locks it into Nvidia's hardware and software, giving the chipmaker control over both ends of the value chain.
In summary, Nvidia has some of the best chips on the market, especially for AI applications, and its CUDA suite creates a durable competitive advantage when it comes to customer stickiness by embedding itself directly into its customers' products from both a hardware and a software perspective. That's an incredibly valuable position considering the AI industry as a whole is expected to surpass $4 trillion by 2033, up from just $189 billion in 2023.
The company's future is bright on many levels. And some recent comments from Morgan Stanley analyst Joseph Moore should get investors even more excited about its long-term prospects.
There's no bubble, one analyst says
The recent pullback in Nvidia's stock price stemmed from many causes. The market overall took a dive earlier this year, dragging many of the biggest names down with it.
But given Nvidia's meteoric rise, many investors are also worried we're in the middle of an AI bubble, pushing valuations far beyond what is reasonable. These investors fear that even more downside is to come, but recent comments from Morgan Stanley analyst Joseph Moore should provide some relief.
In a note to clients last week, Moore wrote: "The idea that we are in a digestion phase for AI is laughable given the obvious need for more inference chips which is driving a wave of very strong demand. Those who want to see this as a bubble are manifesting that through the various conversations about longer-term data center leases, but it's hard to have that view when you talk to actual customers about actual demand which remains strong."
Those comments certainly line up with Nvidia's backlog figures. Many of its chips have 12-month wait lists, and there's been little sign from data center operators -- a key customer category for Nvidia's GPUs -- that spending won't grow tremendously in the years to come, even if there is some short-term noise along the way. "We are hearing about demand levels that are tens of billions above current run rates, limited by supply," Moore said in his note.
NVDA PE Ratio data by YCharts; PE = price to earnings.
The AI revolution is far from over. And even with a premium valuation, Nvidia still trades at just 25 times forward earnings, hardly unreasonable for a profitable company growing this quickly.
With such huge demand projected for AI GPUs through this decade and beyond, don't be surprised to see Nvidia's stock continue to soar well beyond today's $2.7 trillion valuation.
