Finance
Where will Nvidia stock be in three years?
Long-term investing is one of the keys to sustainable returns in the stock market. This strategy ignores short-term volatility, giving a company’s fundamental qualities time to mature.
With shares up nearly 20,000% over the past decade, Nvidia (NASDAQ: NVDA) is an excellent example of these principles. Let’s see if the chipmaker has what it takes to continue beating the market over the next three years.
The best stock in artificial intelligence (AI).
It’s hard to imagine a better AI company than Nvidia, the top producer of the graphics processing units (GPUs) needed to train and run these complex algorithms. Business is booming: Fourth-quarter sales are up 265% to $22.1 billion, and profits are up 769% to $12.3 billion.
While rivals can sometimes replicate Nvidia’s products in raw performance, it protects its position through CUDA, a programming platform and software solution optimized for Nvidia hardware.
Despite these strong fundamentals, the stock is trading at a price of forward price-earnings ratio (P/E) multiple of just 37. This valuation is moderately higher than the Nasdaq100 on average 29 but much cheaper than comparable chip makers such as Advanced micro devices, which has a price-to-earnings ratio of 43, despite revenue growth of just 2% to 5.47 billion in the most recent quarter. To make no mistake about it It, Nvidia stock is cheap.
Why is the market discounting Nvidia?
Nvidia’s risks don’t seem to have much to do with the company itself. The chipmaker has successfully created a moat around its GPUs and has a technological edge over its competitors. And it’s expanding its addressable market through software and a huge move toward custom chips for customers.
Within the AI chip market, the company seems to have done everything right. That said, the country has become alarmingly overexposed to this one sector.
In the fourth quarter, the data center segment (which is dominated by sales of AI GPUs) generated $18.4 billion, or 83% of total revenue. And the company’s gaming segment – previously the core – is now barely moving with just $2.8 billion in revenue. Its increasing lack of diversification makes it uncomfortably vulnerable to changes in the consumer AI market.
As the AI-related hype begins to fade over the next three years, companies will need to generate substantial revenue and cash flow to justify the billions they make. are spending on Nvidia’s AI hardware.
According to The Washington PostAI chatbots like ChatGPT lose money on every search due to high construction and operating costs major language models (LLMs).
Another challenge will come from open-source AI platforms like Elon Musk’s Grok, which allow anyone to build projects on source code for free, potentially eroding the industry’s profit potential. All of this could make it less financially attractive for Nvidia’s customers to continue spending so much on its expensive GPUs.
How will Nvidia perform over the next three years?
With its high growth rate and reasonable valuation, Nvidia can continue to outperform the market over the next three years. And in the very long term (think decades), the chipmaker’s technological lead in GPU design could help it expand into more sectors like automotive manufacturing or virtual reality, which could solve the problem of lack of diversification . That said, investors buying the stock now face significant near-term risks if the AI industry doesn’t make it happen expectations.
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 three years? was originally published by The Motley Fool
