Over the previous three years, Nvidia's (NVDA +4.30%) stock price performance has been nothing short of explosive -- and this isn't because of speculation.
The company is selling its cutting-edge graphics processing units (GPUs) almost as fast as it can get them made. And demand shows no signs of letting up, as big tech companies continue to pour billions into the generative artificial intelligence (AI) opportunity.
But past performance doesn't guarantee future results in the stock market. And many investors are left wondering if Nvidia's $4.4 trillion market cap can keep growing long term.
Let's discuss the pros and cons of the stock to figure out what the future may hold.
Image source: Getty Images.
Third-quarter earnings were another blowout
With its market cap of $4.4 trillion, Nvidia is the largest company in the world. That said, it is still growing at such a massive clip that it resembles a start-up. Third-quarter earnings highlight the company's impressive business momentum. Sales jumped 62% year over year to $57 billion, driven by the data center segment, where the company sells its most advanced GPUs, such as Blackwell for training and running AI algorithms.
Management aims to maintain momentum through constant updates. And in September, they revealed a next-generation GPU called Rubin, designed to handle the complexities of AI video generation with more speed and efficiency. This new product is expected to be available at the end of 2026 and may help spark another leg of growth in 2027 and 2028.
Nvidia has a powerful economic moat because it has integrated its hardware with a software and programming solution called CUDA, designed to help it reach its maximum potential. Many organizations and developers are already familiar with CUDA, making it costly and difficult to switch to alternatives, even if they catch up on raw technical stats.
Nvidia leverages this advantage to deliver an impressive gross margin of 73.4% in the third quarter, which is incredibly high for a software company. By contrast, enterprise software giant Microsoft has a gross margin of around 69% despite not usually selling physical products.
High margins usually mean fat profits. And Nvidia's third-quarter net income jumped 65% to $31.9 billion, generating plenty of cash that will likely be returned to investors through share repurchases.
NASDAQ: NVDA
Key Data Points
How much longer can this last?
On the surface, Nvidia seems to be the almost perfect growth stock. It operates in a cutting-edge and fast-growing industry, while its deep economic moat gives it a commanding market share and impressive profitability. But there are some risks investors should keep in mind.
For starters, generative AI is expensive. One ChatGPT query uses as much energy as 10 Google searches. And Nvidia isn't helping the cost and sustainability situation by selling its hardware for such huge markups.
The result is that industry leaders like ChatGPT are burning through boatloads of money with their consumer-facing large language models (LLMs). The start-up is estimated to have lost around $11.5 billion in the last quarter alone. And these losses call into question the sustainability of AI hardware demand while giving large Nvidia clients like OpenAI an incentive to pivot to cheaper alternatives to run their businesses.
OpenAI has started developing its own custom AI chip in partnership with the fabrication company Broadcom, which it plans to use internally. Custom chips allow a company to bypass the high prices of Nvidia's general-purpose hardware while also saving on operating costs, since they are designed for efficiency in specific workloads. Other major Nvidia clients, such as Google and Amazon, are also investing in custom chips, so this could become a significant challenge in the coming years.
Is Nvidia a buy?
From a fundamental perspective, Nvidia still looks like a winner over the next three years and beyond. Business is booming. And with a forward price-to-earnings (P/E) multiple of just 23, the stock is actually cheaper than the Nasdaq-100's average estimate of 26. That said, sometimes the numbers don't tell the whole story. Generative AI is still highly speculative and loss-making, which means demand for Nvidia's chips might not remain at these levels forever. Investors may want to look for more diversified ways to bet on the industry.
