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Where will Nvidia stock be in five years?




Where will Nvidia stock be in five years?

Long-term investing is the key to generating sustainable returns in the stock market. Perhaps few will understand this better than Nvidia (NASDAQ: NVDA) shareholders, who have delivered total returns of more than 3,000% over the past five years, despite challenges like the COVID-19 pandemic and rising interest rates, which have crushed many stocks in the short term.

But what might the next half decade have in store for this powerful technology leader?

The king of AI capabilities

Since the release of OpenAI’s ChatGPT in late 2022, the tech industry has been scrambling to gather generative artificial intelligence (AI) hardware like Nvidia graphics processing units (GPUs), which provide the processing power needed to run and train AI’s complex algorithms. Nvidia’s second-quarter results show how this new demand has transformed its business.

Turnover doubled year after year to $13.51 billion, driven by sales of high-end data center GPUs like the H100. Profits rose eightfold to $6.18 billion. And management aims to expand the company’s dominance by increasing the pace at which it releases new AI chips from biannually to annually, which will put even more pressure on competition.

Nvidia is also expanding into new capabilities such as custom chips, a $30 billion opportunity to serve customers with needs for their AI workloads that are not as well served by one-size-fits-all solutions.

Overallthe company appears capable of maintaining its 80% market share in the AI ​​chip sector over the next five years and possibly beyond.

The rating is not as good as it seems

Although its market cap will more than double by 2024 alone, Nvidia’s stock seems reasonably priced when compared to its earnings figures. Immediately forward price-earnings ratio (P/E) of approximately 49, the company’s expected future earnings are valued at a premium of the NASDAQ100‘S an average of 29 – no surprise given the company’s growth (first quarter profits rose 628% year over year to $14.9 billion). But this situation is much more complicated than it seems at first glance.

Most of today’s big tech companies have built their revenues over decades from businesses that are well integrated into the productive economy. But this is not necessarily the case for most of Nvidia’s explosive growth since 2022. The chipmaker has become too dependent on the speculative AI industry currently doesn’t generate much revenue or cash flow.

Nervous man looks at his stock chartNervous man looks at his stock chart

Image source: Getty Images.

According to Sequoia Capital, the AI ​​industry has already spent $50 billion on Nvidia’s AI chips, while generative AI startups have only made $3 billion in revenue. In other words, the AI ​​boom has grown tremendously so far is based about the proverbial selling of picks and shovels to miners instead of actually digging gold out of the ground. This is an untenable situation – unless things change, those “miners” will eventually be unable to afford their hardware expenses.

With this inconvenient fact in mind, Nvidia stock isn’t cheap, as its current valuation assumes demand for AI GPUs will remain high. And this is far from guaranteed.

Are Nvidia Stocks a Buy?

In the long run, Nvidia could weather some of its biggest short-term challenges. While many consumer-oriented AI companies are currently losing money, they could eventually grow into profitable ventures capable of sustaining massive spending on Nvidia chips.

The industry could also diversify with contributions from AI use cases such as self-driving cars and robotics, which would be great news for Nvidia shareholders.

But these are all what-if scenarios. And with Nvidia stock currently perfectly priced, it seems risky to bet on this long-term proposition. It may make more sense to wait until more information becomes available.

Should You Invest $1,000 in Nvidia Now?

Consider the following before buying shares in Nvidia:

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Wil Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has one disclosure policy.

Where will Nvidia stock be in five years? was originally published by The Motley Fool