Nvidia (NVDA +1.12%) has been one of the biggest successes in artificial intelligence (AI) over the past five years, as the company's sales and earnings have skyrocketed due to demand for its AI processors. The increasing need for the company's semiconductors has fueled the company's share price rise, pushing Nvidia stock up more than 1,200% over the past five years.
Spoiler alert: The next five years are unlikely to bring similar results. However, Nvidia and its shareholders are likely to still benefit significantly. Here's why:
Image source: Nvidia.
1. AI semiconductor demand is still very high
Before Nvidia reported its fiscal third-quarter results, investors were on edge. The market had been wondering if all the talk of an AI bubble was true.
It turns out, there's still plenty of demand for Nvidia's processors. The company's data center revenue rose 66% in the quarter to $51.2 billion. What's more, Nvidia's non-GAAP (adjusted) earnings per share popped 60% to $1.30, outpacing Wall Street's consensus estimate of $1.25.
While Nvidia's strong quarterly results didn't necessarily disprove that some parts of the AI market are overvalued, it certainly proved that demand for the company's semiconductors remains very high.
2. More spending is likely on the way
Nvidia's impressive third-quarter results are, of course, just a snapshot of what's happening with the company at the moment. However, it's also likely an indicator of what the company may continue to experience over the next few years.
Nvidia CEO Jensen Huang has said that tech companies will invest $3 trillion to $4 trillion over the next five years as they continue to build out their artificial intelligence infrastructure. And before you write this off as just another optimistic tech CEO pumping up his own company's opportunity, consider that Alphabet, Meta Platforms, Amazon, and Microsoft are collectively spending $380 billion in capital expenditures (capex) this year. Much of that spending is going to data center investments, and Alphabet's management has said it will "significantly increase" its spending next year.
Even if Huang's estimate turns out to be a little optimistic, the tech companies building AI have committed billions of dollars in new spending and could continue to do so for years.
NASDAQ: NVDA
Key Data Points
3. A slowdown in spending won't spell doom for Nvidia
This might be an unpopular opinion, but I don't think slowing AI spending will be all doom and gloom for Nvidia. Yes, its share price could slide once tech companies scale back their initial AI investments. However, over the long term, I believe Nvidia's processors will continue to be in demand.
Consider that the company has 90% of the AI data center market for GPUs. The initial surge in building AI data centers with Nvidia's GPUs is what the company is experiencing now. But over time, tech companies will need to update their data centers and upgrade them with newer, more powerful processors.
This means that Nvidia has a longtail benefit from all of these data centers being built. When spending slows, it doesn't mean it will dry up completely. And as the leading provider of AI GPUs, Nvidia is likely to remain the go-to choice for future data center upgrades for years to come.
Nvidia is a buy-and-hold stock for the long term
There's certainly a lot of exuberance in the market for AI stocks right now, and some of it is unwarranted. Numerous AI companies lack impressive sales and are unprofitable, yet they are trading at very frothy valuations.
However, Nvidia is still experiencing significant growth in AI, and companies continue to invest substantial funds to stay competitive in this space. The result of this is that Nvidia stock could continue climbing over the next five years.
Don't expect the explosive gains from the past few years, but it's certainly too early to ignore this dominant AI company.
