Nvidia (NASDAQ: NVDA) has seen an incredible rise of 29,000% in its stock price since 2014. Investors lucky enough to buy early have transformed small investments into significant wealth.

However, substantial past gains do not promise future success. This article explores whether Nvidia remains a smart investment.

Nvidia’s Fluctuating Journey

Nvidia has recently surged, largely due to advancements in generative artificial intelligence (AI). Before late 2022, when the success of OpenAI’s ChatGPT changed the landscape, Nvidia experienced several cycles of rapid growth followed by decline. The company’s innovative graphics processing units (GPUs) were often tied to fleeting trends in different sectors.

In the early 2000s, Nvidia focused on gaming, but the emergence of cryptocurrencies, like Bitcoin, led to a surge in GPU demand for mining, which required complex computations.

Eventually, these once-promising sectors stagnated, with GPU sales in gaming contributing only $2.9 billion, amounting to less than 10% of the total sales in the company’s fiscal second quarter.

Today, Nvidia’s data center segment generates about 88% of its revenue. Although the company doesn’t provide a product-by-product breakdown, most sales likely stem from advanced AI chips like the H100 and H200, vital for training and managing large language models (LLMs). However, a decline in LLM demand could significantly impact Nvidia’s recent growth.

Challenges Ahead for Nvidia

There is a possibility that Nvidia’s rapid AI-driven growth may soon experience a slowdown, or even a downturn. In the second quarter, the company reported a 122% year-over-year revenue increase to $30 billion. However, this spike could be unsustainable, stemming from tech firms aggressively investing in chips to stay competitive, even if profitability isn’t on the horizon.

One major spender is Meta Platforms, a top customer of Nvidia. In 2024, Meta anticipates capital expenditures between $38 billion and $40 billion, much of which will go toward Nvidia GPUs. Although CEO Mark Zuckerberg is optimistic about the investment, how they will turn this enthusiasm into financial returns remains uncertain.

Differing from giants like Amazon and Alphabet, Meta lacks a cloud platform to monetize its computing resources. Furthermore, its leading LLM, Llama, is freely available as open-source, complicating any monetization efforts.

This situation is reminiscent of Zuckerberg’s previous ambitious venture: a project called the Metaverse, which led to the company incurring roughly $46.5 billion in costs with minimal outcomes.

Nvidia isn’t alone in supporting speculative AI models. Tesla, the electric vehicle manufacturer, is also a large purchaser of Nvidia chips for its Dojo supercomputer project, which CEO Elon Musk admits is a risky endeavor.

Many of Nvidia’s major clients have uncertain AI strategies, raising concerns that shareholders may eventually question the extensive capital outlay, possibly decreasing chip demand.

Looking Optimistically at Nvidia

Despite the uncertainties surrounding Nvidia’s future, analysts remain hopeful. Projections for the AI industry are robust, with PwC estimating a contribution of $15.7 trillion to the global economy through enhanced labor productivity and consumer demand. If these forecasts hold true, Nvidia’s impressive journey may only be beginning.

Image source: Getty Images.

In an ideal scenario, the primary challenge to monetizing AI lies in technological barriers. Nvidia can potentially surmount these by releasing superior hardware, such as its new Blackwell-based AI chips. As chip efficiency improves, running LLMs could become more cost-effective, possibly leading to increased profitability.

Should You Invest in Nvidia?

With a market cap of $3.5 trillion, Nvidia holds the title of the largest company in the world. However, its capacity to generate significant future returns appears limited. While predicting the future is challenging, the likelihood of a downturn seems greater due to fewer assumptions required for the bear case.

At present, many clients of Nvidia are not yielding sufficient financial returns to validate their AI investments. Although the introduction of Blackwell chips may catalyze a new growth phase in the short term, long-term investors might consider waiting for a market correction before acquiring shares.

Opportunity Awaits in the Stock Market

Ever thought you missed the chance to invest in outstanding stocks? Don’t worry; the opportunity might be back.

Occasionally, our expert analysts endorse a “Double Down” stock recommendation for companies expected to see significant growth. If you believe you’ve missed your opportunity to invest, it may just be the perfect moment to get in before it’s too late. Here are some impressive returns:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $22,819!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,611!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $444,355!*

Currently, we are issuing “Double Down” alerts for three remarkable companies, and this opportunity may not come again anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 11, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Bitcoin, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.