Nvidia’s leading position in AI and GPUs presents investment opportunities, though careful consideration is needed due to potential market risks.
- Nvidia’s dominance in AI and GPUs positions it for growth amidst transformative technology trends, supported by robust fundamentals and valuation.
- Despite premium pricing, market surprises and sustained growth could continue driving Nvidia’s stock appreciation.
- However, risks like the cyclical semiconductor sector and potential disruption underscore the need for careful investment consideration.
Nvidia stock (NVDA) has been the darling of the equities market for several quarters, and for good reasons. The company is, by far, the leader in artificial intelligence (AI) and graphics processing units (GPUs), powering everything from cutting-edge gaming PCs to data centers.
But with Nvidia’s stock price reaching new highs, is it still a good investment? Here, we’ll explore two main reasons why Nvidia may still be an attractive option.
The Unquestionable AI Leader
Artificial intelligence is transforming industries at an unprecedented pace. From facial recognition software to autonomous vehicles, AI applications are becoming increasingly sophisticated and require immense computational power. This is where Nvidia shines. It’s widely agreed upon that the development of this crucial market will rely heavily on Nvidia’s hardware — the (small) risk is that the company might face disruption just as it disrupted the market.
The GTC conference underscored Nvidia’s continued leadership, highlighted by the strong performance of the new Blackwell architecture, which will be integrated into new chips like the B200. Its inference performance is up to 15 times greater than its competitor, the H100.
Regarding demand for the company’s chips, not only has it increased, but it’s estimated to continue rising over the next few years as new industries invest in this area and technology evolves further, as emphasized in various statements by Jensen Huang.
Multiple sources point to the growth of this Total Addressable Market (TAM). According to Mordor Intelligence data, the GPU market size is expected to grow at a nearly 33% CAGR over the next 5 years, reaching around $206 billion by 2029.
This aligns with Nvidia’s vision, projecting a “$1 trillion Long-Term Available Market Opportunity”, driven by various fronts such as omniverse enterprise, autonomous machines, AI Enterprise, and of course, Data Centers and Gaming.
In summary, Nvidia’s unquestionable leadership in this sector, coupled with a technological lead over its peers, positions it to directly benefit from this trend. From my perspective, the key point of uncertainty in the thesis is how recurring these revenues will be after the bulk of AI CapEx is done, and how much updates to new GPUs will reflect in revenue growth and solid margins for the company. It’s reasonable to imagine that it will maintain this revenue for the next few years, but it remains a risk to monitor.
Not That Expensive, Can Continue to Climb Next Quarters
It’s true that Nvidia stocks aren’t cheap and have a small margin of safety. However, the fundamentals are so robust and have grown (and are expected to continue growing) at such a pace that the multiples aren’t overly rich. For example, on a Next Twelve Months (NTM) basis, the market estimates Nvidia’s Price-to-Earnings ratio to be 34x, very close to Microsoft, which is trading at 33.8x.
If the company achieves the consensus, projecting an EPS growth of ~20%, by the end of 2026, this multiple will be less than 24x. It’s still not a multiple that catches the eye and can be considered a bargain, but it’s more plausible to consider that such a multiple reflects its growth and premium position in the sector than it being an unfounded bubble.
Thus, Nvidia stock proves to be an extremely challenging stock to evaluate. The question of “At what multiple should the most important AI stock, with all these moats and projected growth, be traded?” is a very difficult one for me to answer.
Another point to mention is that in the short term, much of the stock’s appreciation driver may come from market surprises. Even though Nvidia is already trading at a premium multiple, if the company continues to outperform market estimates, the stock should continue to rise.
Conversely, since there’s a narrow margin of safety, if the company starts to falter and fails to continue surprising the market, we should see a depreciation of the stock—since an optimistic scenario is priced into this price.
The Bottom Line
Nvidia’s leadership in AI and GPUs positions it well to capitalize on some of the most transformative trends in technology. Its powerful hardware, robust software ecosystem, and solid finances combined with a “reasonable” valuation make it an interesting investment opportunity.
However, as with any investment, there are always risks. The semiconductor sector is cyclical, although we’re seeing huge demand and few issues in this regard, an economic slowdown and new trends could affect demand for Nvidia’s products. Additionally, other less trackable risks, such as disruption of its model by competitors, seem low but still exist.
Therefore, even though Nvidia Stock has already shown significant recent performance, there are still reasons to stay invested in the thesis. Nevertheless, I don’t consider it such an asymmetric thesis, as it will be difficult to surpass the market’s optimism already priced into the stocks.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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