In the last five years, Nvidia (NVDA -3.69%) Investors have been on a roller coaster ride as stocks have gone from boom to bust and back. And while the chipmaker ended the period up a whopping 562%, it wasn’t an easy ride. Let’s explore what Nvidia’s next five years might look like and decide if it’s a good time to bet on the stock.
A new era of hyper-growth and competition
Analysts at Price Waterhouse Coopers expect Artificial Intelligence (AI) Contributing $15.7 trillion to the global economy by 2030, as it is used to increase productivity, drive consumer demand and drive innovation across industries. Over the next five years, Nvidia is poised to capitalize on this megatrend in a big way. Although the company does not offer consumer-oriented generative AI applications, AI-enabled GPU chips such as the A100 and H100, which train and power applications such as ChatGPT, have an impressive 80% market share.
AI effects are already being seen in Nvidia’s operational results. Revenue jumped 101% year-over-year to $13.5 billion, driven by growth in data center chip sales for generative AI applications. Investors should expect the company to report higher top-line growth rates for the next few years as the use of AI becomes more entrenched in the economy. That being said, it won’t necessarily be an easy road ahead.
Contestants love it Amazon And Advanced Micro Devices are working on their own AI-enabled chips that can compete with Nvidia. And the company has to work hard to protect it economic moat against new entrants. Increased competition could put pressure on margins, and Nvidia will have to rely on research and development to maintain its lead.
Weak sections can eventually recover
Over the past few quarters, Nvidia has faced significant pressure in its gaming division, where it sells video game PCs and graphics processing units (GPUs) used for cryptocurrency mining. The business has faced consumer pressures such as inflation and rising interest rates, which reduce people’s spending power and encourage them to buy cheaper (often used) chips instead of Nvidia’s latest offerings.
However, this section may have finally bottomed out. And in the second quarter, sales began to show signs of recovery, with sales up 22% to $2.49 billion. Over the next five years, it looks like the microeconomic challenges will ease further, paving the way for Nvidia’s highly cyclical gaming division to emerge from the current downturn. A company can boost growth by applying AI technology.
In the second quarter, the company released its Nvidia Cloud Engine for Games, a customizable AI service to help game developers create and deploy advanced speech and animation in their projects. This unique initiative could help increase and diversify Nvidia’s gaming segment revenue outside of graphics hardware.
Nvidia may rise to its lofty valuation
After a whopping 225% year-to-date gain, Nvidia’s stock has undoubtedly gotten expensive. with a lag of 12 months Price-to-earnings (P/E) multiple 109, shares of Nvidia have been dwarfed S&P 500 An average of 25. But Nvidia’s GPU business is also growing, so the company looks set to increase its valuation, which means its financial performance should catch up to its stock price. Looking at projected earnings 12 months into the future, Nvidia’s (forward) P/E drops to just 42, which is not unreasonable for a rapidly expanding industry leader with a strong moat.
Investors shouldn’t expect Nvidia’s share price to maintain its strong growth rate over the next five years or mirror its performance over the past 12 months, as much of the company’s business expansion is already priced in. Instead, the stock will likely move slowly as its valuation returns to historical norms. However, the chipmaker’s current valuation may not fully account for its long-term prospects — especially if the artificial intelligence boom lives up to analysts’ expectations, meaning the stock still has plenty of room for upside and could possibly continue to outperform broader benchmarks in the near term. While we don’t yet know how big the long-term AI opportunity will be, Nvidia will certainly play a big role based on its industry-leading hardware.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of Amazon subsidiary, The Motley Fool. Will Ebifung does not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Advanced Micro Devices, Amazon.com and Nvidia. Motley Fool has a disclosure policy.