Nvidia (NVDA +2.06%) is perhaps the most talked-about stock in the market. This makes a lot of sense because it's the largest in the world by market cap, but there are many growing concerns about the health of its business. AI hyperscalers are spending heavily on AI data centers, and with the majority of Nvidia's business coming from data center chip sales, some investors see Nvidia as a bit of a precarious investment.
But is that true? Or is Nvidia stock actually a buy right now?
Image source: The Motley Fool.
Data center spending isn't slowing down anytime soon
Despite investors' concerns about AI spending, it isn't likely to slow down. Why? Because every AI hyperscaler would need to slow their spending. The risk of underspending is far greater than the risk of overspending. If it turns out that all of this computing capacity is needed, the more conservative companies will be hindered in the future. On the flip side, if every company spends too much, they will at least be in the same boat.
This feeds long-term projections, such as one from Nvidia that projects that global data center capital expenditures will reach $3 trillion to $4 trillion annually. While that number sounds like a lofty figure, it's really not as big as you think. The big four AI hyperscalers are planning to spend around $650 billion on capital expenditures this year. That doesn't include some of the other big spenders like OpenAI or Oracle. Other regions of the world are also spending big on AI, like China. Furthermore, Europe has been relatively dormant on the AI front, but that could change over the next few years when it sees the impacts it's having on its peers.
NASDAQ: NVDA
Key Data Points
Additionally, with the rate that each hyperscaler is growing at, it's not unreasonable to assume their cash flows could double in the next five years, giving them access to far more capital to spend. This could enable the big four to increase their capital expenditure budgets over the next few years.
On another note, a lot of the capital budgets are going toward construction and land costs right now. Data centers don't go up overnight, and a larger chunk of their capital expenditure budgets will go toward chips over the next few years. This gives Nvidia a massive growth catalyst, yet the stock only trades like it's going to grow for one more year.
NVDA PE Ratio (Forward) data by YCharts
At 22.6 times forward earnings, Nvidia is priced like it's going to have solid growth this year, then none after that. However, we know that's not a fair projection for Nvidia's stock because growth is likely to continue through at least 2030. This makes Nvidia a screaming buy now, and investors can feel confident loading up on it before the rest of the market catches on.
