Nvidia (NASDAQ: NVDA), the chipmaker that makes hardware for generative AI applications, is one of the biggest winners in the megatrend. The company's "picks and shovels" approach has Wall Street raving, with shares up 78% in 2024. Should investors keep buying the stock? Dig deeper to discover the next five years' possibilities.
Nvidia's rally makes sense. It appears that the company's two-year parabolic rally is not a speculative bubble. Fundamentals support the company's stock price, and strong fourth-quarter results show its momentum.
Nvidia's revenue rose 265% to $22.1 billion as data center clients bought GPUs to create and run their AI infrastructure. According to CNBC, Nvidia's flagship h100 costs roughly $40,000 on third-party marketplaces. The company's gross margin rose 12.7 points to 76% due to product mix changes.
Despite its wealthy sector, Nvidia has little competition. AMD's MI300X AI chip sales have been slow. While Alphabet, Amazon, and Tesla are investing in proprietary GPUs for their specific workloads, Nvidia is targeting this market with its own custom chips, which could dominate the $30 billion opportunity due to its economies of scale and manufacturing expertise.
What might the next five years bring? Nvidia is well-positioned to capitalize on the rapid expansion of generative AI, which Bloomberg predicts will be worth $1.3 trillion by 2032. If AI meets these high expectations, Nvidia should continue with market-beating growth and even become the most valuable corporation. It ranks third behind Microsoft and Apple with a $2.2 trillion market valuation.
Nvidia's revenue growth would likely decrease as the sector consolidates and clients stockpile AI technology, even in the best-case scenario. Nvidia's constant innovation can keep the competitors at bay. New devices like the GB200 (coming this year) provide 30X the inference for large language models (LLMs) compared to the chipmaker's flagship GPU, the h100.
Inference is generative AI application execution. Faster CPUs like the GB200 could enable clients run larger, more sophisticated LLMs and respond to user searches faster. The new processor can boost data center profits with 25x the energy efficiency of the H100. Existing customers have plenty of incentive to upgrade to Nvidia's newer products to stay competitive.
Can anything go wrong? Nvidia seems great, but investors shouldn't disregard future risk factors. Generative AI companies must start making money to justify buying Nvidia's pricey hardware.
The Verge predicted in February that 2024 will be a year of reckoning for the business as lofty expectations must be met by cash flow and earnings. What happens next is unknown. Although Nvidia's 37 times forward earnings valuation looks to price in uncertainties, the company remains a buy.
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