OpenAI launched ChatGPT on Nov. 30, 2022, kicking off a frenzy of excitement about generative AI -- and a flood of spending on it. Few companies have benefited more from that than Nvidia (NVDA 1.58%). The chipmaker's graphics processing units (GPUs) have proven essential hardware for training and running generative AI applications.
Since ChatGPT's launch, Nvidia's stock price has increased more than tenfold. It's now the most valuable company in the world with a market cap exceeding $4 trillion.
But the next three years are bound to look different from the previous three. And one AI stock looks poised to outperform the leading GPU maker through 2028, based on their current valuations and competitive forces.
Image source: Getty Images.
Can Nvidia stock keep climbing?
Nvidia's financial results over the past three years have been nothing short of incredible. And as the generative AI boom continues, it continues to put up extremely high revenue and earnings growth.
The company reported a 73% year-over-year increase in data center revenue during its fiscal 2026 first quarter, which ended April 27, as big tech companies looked to outfit their data center servers with Nvidia's latest chips. That led to a 33% increase in the company's earnings per share. However, that EPS number included a $4.5 billion writedown on its inventory of H20 GPUs meant for the Chinese market. Without that, its earnings per share would've been up 57%. President Trump has since lifted the U.S. ban on selling to China. As part of that policy shift, Trump is requiring the company to pay 15% of its China sales to Washington -- but it does mean that the writedown can be reversed, as the H20s now have value again.
All that said, Nvidia still faces some headwinds to its continued growth. Competitors are starting to make progress in catching up to Nvidia with their own AI accelerator chips. AMD (AMD 2.33%) recently unveiled its MI400X, which is competitive with Nvidia's Blackwell Ultra platform. While the MI400X is slower than the Rubin architecture chips that Nvidia expects to launch in the second half of 2026, it sports a significant advantage in memory capacity, which has become a significant bottleneck in AI training. Still, some data center customers will likely bring some of their business to AMD due to its price performance, and also to keep their biggest GPU supplier in check.
NASDAQ: NVDA
Key Data Points
On top of that, the biggest Nvidia customers are all developing custom AI accelerators. Over the long run, custom silicon could reduce demand for Nvidia's general-purpose GPUs for AI training and inference, at least among the tech giants. That said, smaller businesses will likely rely on cloud providers offering access to Nvidia GPUs for their AI processing needs.
These headwinds make it hard to justify Nvidia's forward P/E ratio of 40. While the stock deserves to trade at a premium, investors who expect that it can continue to put up results like it has for the past few years may be overestimating its position in the market. As a result, I expect that its valuation multiple will be compressed over the next few years, which will drag on the stock's gains.
The AI stock that's poised to grow faster than Nvidia
While Nvidia has been and will remain a clear winner from the boom in AI spending, not every business that's exposed to the trend has as much clear-cut potential. For some companies, AI is as much a threat as it is an opportunity. One such business is Adobe (ADBE 7.53%).
Adobe's Creative Cloud suite is the leading software for creative professionals. Because generative AI makes it easier for anyone to create and edit photos, images, and graphics, many expect the developing tech to undermine the need for Adobe's tools. On the other hand, Adobe has invested in building its own AI model, Firefly, which it trained on its library of stock images and videos. Firefly is capable of generating images and videos, and helps creatives get the most out of Adobe's powerful tool set.
Right now, the market overwhelmingly views the threats of AI as outweighing the benefits for Adobe. The stock is down by more than 40% from the all-time high it touched at the start of 2024. But that sell-off may be a huge opportunity for investors.
Creative professionals who don't use Adobe's software put themselves at a disadvantage. It's an industry standard. Any designer, photographer, or videographer who is looking for work had better have familiarity with how to get the most out of Adobe's Creative Cloud because the entire industry uses it. That means there are extremely high switching costs to moving away from it, which should help Adobe retain its core customer base.
NASDAQ: ADBE
Key Data Points
Moreover, Adobe is building on top of a strong customer base across its Creative, Document, and Digital Experience platforms. The generative AI tools it is embedding in its software are helping it boost revenue per user and are improving retention rates. The Firefly app that it released in June is credited with drawing in many new users to the Adobe franchise, which saw a more than 30% year-over-year increase in first-time subscribers in its last fiscal quarter, which ended May 30.
Overall, management expects revenue from AI products to more than double this year, although it remains a small portion of the company's total revenue. But when you consider the indirect effect, there's a clear impact. The company reported 12% growth in annual recurring revenue last quarter, and it expects 11% for the fiscal year. Despite its already high margins, growing into its AI investments should result in some margin expansion over time.
Management uses the steady free cash flow generated by Adobe's subscription revenues to buy back shares. It bought back 8.6 million shares last quarter. Assisted by its steadily shrinking share count, the company should be able to produce consistent double-digit percentage earnings per share growth over the next three years. But right now, the stock trades at just 17 times earnings. I expect that multiple to expand over time as Adobe continues to produce consistent earnings growth. That should lead the stock to outperform Nvidia through 2028.
