Nvidia (NVDA -2.34%) may be the most valuable company in the world, but it still has a lot of gas in the tank to push its value even higher in the next year. The company still has tremendous growth opportunities in front of it and a wide moat to keep competitors at bay.
Nvidia's growth machine keeps running
Nvidia has been a growth machine over the past few years, and it doesn't look like that is about to slow down. In Q2, its revenue grew 56% year over year to $46.7 billion, despite no longer being able to sell its chips into the Chinese market. Most of its growth is stemming from its data center segment, where its graphics processing units (GPUs) have become the backbone of the artificial intelligence (AI) infrastructure buildout.
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In Q2 (it reports Q3 data on Nov. 19), its data center revenue soared 56% to $41.1 billion, and it was up nearly 4x in the past two years, as it generated $10.3 billion in data center revenue in its fiscal 2024 Q2. That's incredible growth.
Nvidia's strength doesn't just come from its powerful chips, but the ecosystem it has built around them. This all starts with its CUDA software platform, which allows developers to easily program its chips for different tasks outside their original purpose, which was to speed up graphics rendering in video games. The company created CUDA to expand beyond the video game market, and while uptake was initially slow, it made the smart move by pushing the software into universities and research labs that were doing early work in AI. This led to much of today's foundational AI code being written on CUDA and most developers being trained on its software. Given the high costs of rewriting code and retraining developers on other platforms, this has created the wide moat the company sees today.
Nvidia didn't just stop with chips and software, though. Its networking portfolio is another big advantage. It created a proprietary interconnect system called NVLink that allows its chips to essentially act as one big unit, making them even more powerful. Meanwhile, its earlier acquisition of Mellanox helped it acquire the networking components that now enable it to offer complete end-to-end solutions it calls AI factories. Within its data center segment, its networking revenue nearly doubled to $7.3 billion in Q3, showing its momentum in this area.
NASDAQ: NVDA
Key Data Points
Massive AI infrastructure spending is still ahead
Nvidia's moat gave it a whopping 94% market share in the GPU market in Q2, demonstrating its dominance. However, the company is starting to see some increased competition, as cloud computing companies and other hyperscalers (companies that own large data centers) are increasingly looking toward custom AI chips, called ASICS (application-specific integrated circuits), to help run some AI workloads, especially for inference, where Nvidia's CUDA moat isn't quite as wide.
While ASICs can help reduce power consumption and lower costs, they are preprogrammed for specific tasks and thus don't offer the flexibility of GPUs. In a world where technology is changing fast, this still gives GPUs an advantage. ASICs also require large upfront investments to be developed, while GPUs tend to be more readily available at a lower initial cost.
Even companies that have developed their own custom chips still rely on Nvidia's GPUs. This can be seen with Amazon, which, while it's using its own custom chips with Anthropic on Project Rainier, it just signed a massive $38 billion, seven-year deal with OpenAI, where it will use Nvidia GPUs to power AI workloads.
Not only are there no signs that the AI infrastructure buildout is slowing, but it is picking up. OpenAI has deals in place to spend an enormous amount of money on AI infrastructure in the coming years, and cloud computing companies have been consistently increasing their capital expenditure budgets to try to keep up with the demand they are seeing. Despite increased competition, Nvidia is still the best-positioned company to capture this growth.
Meanwhile, with a forward price-to-earnings (P/E) ratio of under 29 times next year's analyst estimates and a price/earnings-to-growth (PEG) ratio near 0.75 times (with under 1 times considered undervalued), the stock's valuation is cheap enough for the company to still have tremendous upside from here over the next year.
