With shares up more than 50% since the start of April, Nvidia's (NVDA +5.93%) stock regained momentum as generative AI technology has become mainstream. While the company's revenue growth is de-accelerating, new priorities like sovereign AI, automotive automation, and robotics could power the next leg of expansion. Let's explore how this story might play out over the next five years and beyond.
The first $4 trillion company
On July 9, Nvidia made history by hitting a market cap of $4 trillion, making it the most valuable company in the world. Software giants like Apple, Alphabet, and Microsoft previously held this position. And Nvidia's AI-driven ascension may be a repeat of the internet-led boom that allowed these companies to overtake 20th-century leaders like General Electric and International Business Machines, or IBM, which dominated the early digital era.
Generative AI's rise has become almost undeniable. And this means a lot of value will shift away from traditional companies to disruptors optimized around the new technology. For example, OpenAI's ChatGPT is already eroding demand for Google Search. And the San Francisco-based start-up expects revenue to top $125 billion by 2029 as it disrupts more industries.
NASDAQ: NVDA
Key Data Points
Investors are betting that the rise of AI will drive demand for the Nvidia chips and infrastructure needed to run and train large language models (LLMs). So far, that is happening. But the future is less clear-cut because Nvidia's clients are trying to reduce their reliance on its chips.
Alphabet and Amazon are already investing heavily in their own chip design capabilities, and others could soon follow suit. According to Reuters, OpenAI aims to finalize its first custom chips this year, with mass production slated for 2026. And while Nvidia's size and popular programming platform CUDA give it a strong economic moat, investors should expect these advantages to erode over time because of the benefits companies can get by designing their own infrastructure.
Could Sovereign AI drive the next leg of growth?
With a few notable exceptions, including SAP and ASML, the E.U.'s stock markets are often dominated by last-century companies like Hermes, LVMH, and L'Oreal, which specialize in low-tech industries like fashion, skincare, and makeup. The continent's domestic companies missed out on much of the 2010s software and internet boom. And the emergence of generative AI could cement its reliance on foreign tech companies, possibly introducing political and cultural incompatibilities.
Nvidia aims to help solve this problem with a business vertical it calls sovereign AI, which is designed to help national governments build LLMs and AI infrastructure within their own borders. The idea has taken off in Europe. And Nvidia is working with France, Italy, and the U.K. to help their local players deploy thousands of its Blackwell chips.
Image source: Getty Images.
Sovereign AI is also booming in the Middle East, where Nvidia is working with a Saudi government-backed company, Humain, to build "AI factories" focused on physical AI solutions like robotics and automation.
In a sense, Nvidia is helping foreign countries reduce their reliance on American hyperscalers, just as these hyperscalers work to replace Nvidia's chips in their business models. And while investors shouldn't expect sovereign AI to be as dynamic as free-market-led solutions, it will probably be more resistant to hostile regulation because it is public-sector-led and likely designed to address public safety concerns.
Where will Nvidia be in 5 years?
The AI industry looks increasingly capable of transforming the world. And that means Nvidia will likely remain a dominant company, despite some near-term challenges. A pivot to sovereign AI could help counteract a potential slowdown in demand as more enterprise clients turn to custom chips and other forms of home-grown AI infrastructure.
But while Nvidia certainly deserves its $4 trillion market cap, investors who buy the stock now may be a little late to the party. The stock's price-to-earnings (P/E) multiple of 53 (the S&P 500 has an average of 30) suggests a lot of the upside is already priced into its valuation.
