Nvidia Hits Record Highs as AI Demand Soars

The technology sector continues to thrive, and Nvidia (NASDAQ: NVDA) is leading the way. On Thursday, Nvidia’s stock reached new heights shortly after hitting a record on Wednesday. Over the past two years, Nvidia has consistently risen, largely due to the explosive growth in artificial intelligence (AI). In 2024 alone, the stock has surged 200% (as of this writing) and shows potential for further gains.

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Understanding AI Adoption Trends

To gauge the landscape of generative AI, investors can look at the major cloud infrastructure providers like Amazon, Microsoft, and Alphabet. All three reported their third-quarter earnings last week. Their executives affirmed plans to heavily invest in AI, particularly focusing on servers and data centers for AI initiatives. Meta Platforms is also ramping up investments to enhance its Llama AI model, fueled by extensive customer data.

Other notable companies are also making strides in AI technology. Recently, Palantir Technologies (NYSE: PLTR) announced impressive third-quarter results, exceeding expectations thanks to “unrelenting AI demand,” as stated by CEO Alex Karp. Their revenue increased by 30% year over year, and earnings per share jumped by 100%.

Palantir’s growth is attributed to its Artificial Intelligence Platform (AIP), which is driving significant revenue in the U.S. commercial sector, up 54% due to a 77% increase in customer numbers. Consequently, the remaining deal value for this segment surged by 73%.

Taiwan Semiconductor Manufacturing (NYSE: TSM) is another crucial player in the AI sector, being a leading manufacturer of high-end chips. The company reported a 39% increase in revenue year over year, with earnings per share rising by 54%. This growth was attributed to robust “AI-related demand.”

Considering these results from major tech firms, it’s evident that demand for AI remains strong across the industry.

Nvidia’s Dominance in the AI Ecosystem

Nvidia plays a pivotal role in AI development. Its graphics processing units (GPUs) are essential for technological advancements in AI today. The company was an early pioneer in parallel processing, which allows for the rapid mathematical computations that AI requires. This innovation has made Nvidia an unrivaled leader.

Originally, GPUs aimed to enhance video game graphics. However, their effectiveness in handling complex computations made them vital for AI processing, especially in cloud services and data centers. Notably, Nvidia held a dominant 98% share in the data center GPU market for both 2022 and 2023, according to semiconductor analyst firm TechInsights. Given its continuous innovation, this share likely remains intact.

The company’s financial performance reflects its strong market position. In the fiscal 2025 second quarter (ending July 28), Nvidia generated record revenue of $30 billion, a 122% increase from the previous year. Data center revenue specifically jumped by 154% to $26.3 billion, while diluted earnings per share surged 168% to $0.67.

However, two areas of concern emerged from the report. First, gross margin decreased to 75.1% from a record high of 78.4% in Q1. This change stemmed from product mix and inventory considerations tied to the launch of Nvidia’s Blackwell AI processors.

The second issue was a projected revenue growth rate of 79%, lower than the previous record triple-digit growth seen for five quarters. While seasoned investors recognize that such slowdowns are typical, a growth rate of 79% still indicates solid performance.

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Wall Street’s Optimistic Outlook

Wall Street analysts, known for differing opinions, have reached a strong consensus on Nvidia’s prospects. Currently, the stock enjoys a buy rating from an overwhelming majority: 92% of the 64 analysts surveyed in October recommend buying or strongly buying, with zero suggesting a sell.

This level of agreement is unusual and reflects Nvidia’s remarkable financial performance. Rosenblatt analyst Hans Mosesmann, an ardent supporter of Nvidia, has a buy rating and a price target of $200 for the stock, indicating a potential 37% upside based on Wednesday’s closing price.

Some investors worry about Nvidia’s declining gross margins. Nevertheless, Mosesmann remains optimistic, calling this a “high-class problem” stemming from rapid product advances. He highlighted the ongoing strength of Nvidia’s Hopper architecture and anticipates strong growth from the upcoming Blackwell AI chip, expected to ramp up in the fourth quarter of fiscal 2025.

A consistent concern for investors is Nvidia’s high valuation. The stock trades at 70 times current earnings, understandably raising caution. However, analysts project earnings per share of $4.06 for Nvidia’s fiscal 2026 beginning in January, suggesting a more moderate price-to-earnings ratio of 37 times forward earnings.

This valuation, though higher than the market average, appears justifiable given Nvidia’s industry leadership, remarkable growth potential, and proven execution. As such, Nvidia remains a buy, even after its impressive 200% gain this year.