Over the last few decades, the American technology sector has made boatloads of millionaires -- not only for founders and CEOs, but also for the thousands of regular people who work at these companies or buy their stock. With shares up by over 23,000% over the last decade, Nvidia (NVDA +2.59%) is the quintessential example of this phenomenon.
But as we all know, past performance doesn't guarantee future returns. And with a market cap of $3.2 trillion, Nvidia is already one of the largest companies on Earth, giving it less room to grow. Let's dig deeper to see what the future might bring for this legendary chipmaker.
NASDAQ: NVDA
Key Data Points
Is AI becoming mainstream?
While Nvidia started its life focusing on consumer video game graphics and cryptocurrency mining, both of those once-core operations have become totally overshadowed by generative AI. As of the fourth quarter, the data center segment (where Nvidia accounts for sales of cutting-edge AI chips) represented a jaw-dropping 91% of its $39.3 billion in sales for the period.
This level of concentration means that a large portion of Nvidia's valuation is tied to the prospects of this one industry. If AI tech exceeds expectations, so will Nvidia. But if the sector falls flat, well -- you know the drill. Right now, it still feels too early to know how things will play out.
Analysts at Jeffries seem wildly optimistic. Their research suggests that three-quarters of businesses already use generative AI in at least one function, and they expect it to drive $1.1 trillion in revenue by 2028.
But investors shouldn't necessarily take these projections at face value. Even if AI becomes a part of mainstream life, there is no guarantee that big profits will follow. And this puts Nvidia's clients in a tough spot.
AI companies are burning through money.
Despite the hype, generative AI remains wildly unprofitable. While giants like Alphabet and Meta Platforms can hide their AI losses within their vast research and development budgets, the scale of the problem is much clearer with pure-play AI companies like OpenAI, the maker of ChatGPT.
The Economist reports that while the start-up's 2024 revenue tripled to $3.7 billion, losses ballooned to $5 billion. And while OpenAI's management believes it can achieve $12 billion in cash flow by 2029, this is far from guaranteed due to the intense competition in the industry.
Chinese open-source rival DeepSeek shows that competitive AI models can be created (arguably) at a fraction of the cost of their U.S. counterparts, which means early leaders may not have much of an economic moat, especially when the technology matures and the rate of model improvement slows. If profit potential shrinks, so will the market for Nvidia's expensive hardware.
Image source: Getty Images.
Nvidia will also face challenges on the hardware side of the industry as companies seek to diversify their supply chains. In April, the Trump administration effectively banned the company from selling its h20 chips to Chinese clients. While Nvidia has already started work on a new compliant chip, it is unclear if Chinese companies will be willing to build their businesses around Nvidia hardware, given the unpredictability of U.S. regulations. Rivals like Huawei are working to take market share.
The easy money has already been made
Nvidia is a big player in a potentially transformational industry, so there is little doubt it can continue to outperform the market over the long term (even though there will be short-term volatility).
That said, the easy money has already been made. New investors shouldn't expect this legendary chipmaker to repeat the multibagger returns it enjoyed over the previous decades. You can attribute the slower progress to the challenging dynamics on both the software and hardware sides of the AI industry.
