Nvidia: The AI Giant’s Future Amid Industry Shifts

Nvidia (NASDAQ: NVDA) has proven to be a standout performer, with its shares rising over 22,000% in the last decade. This massive increase has generated significant wealth for its shareholders. Currently, Nvidia boasts a market cap of $3 trillion, making it the third-largest company worldwide. However, there are growing concerns about the sustainability of AI hardware spending, leading many to question how much further the company can grow. Let’s explore Nvidia’s future prospects.

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The Hype Around AI Technology is Evolving

Since OpenAI launched ChatGPT in 2022, major tech companies have rushed to keep up in the competitive field of large language models (LLMs). These AI algorithms generate conversational responses based on extensive training data. Companies are spending billions on Nvidia’s advanced graphics processing units (GPUs) to support their AI initiatives.

For major cloud service providers like Alphabet and Amazon, investing in Nvidia makes sense as they can lease their AI computing power to startups through their cloud services. However, other significant clients, such as Meta Platforms, which plans to invest $60 billion to $65 billion primarily on AI-related capital expenditures, may find the returns on such investments less appealing.

Meta aims to remain relevant in an uncertain market, but its approach could lead to shareholder dissatisfaction over excessive spending that could otherwise be allocated for dividends or share buybacks.

Nvidia’s Growth Shows No Signs of Slowing

Despite concerns over the sustainability of AI spending, Nvidia’s operational performance remains solid. In the third quarter, the company’s revenue surged 94% to $35.1 billion, fueled by high demand for its premium data center chips designed for training LLMs.

Interestingly, Nvidia’s gross margin of nearly 75% is on par with many software firms, contributing to an operating income that doubled to $21.9 billion in the third quarter.

In the coming quarters, products based on Nvidia’s latest Blackwell GPU architecture are expected to drive growth and profitability. Moreover, reports suggest that the rise of low-cost competitor DeepSeek, which claims to have created a leading LLM using “primitive” H800 chips, isn’t significantly impacting Nvidia’s demand.

Some experts have raised concerns that DeepSeek may have copied U.S. technologies, such as those from OpenAI. If this is true, it indicates that Nvidia’s high-performance GPUs remain essential for developing advanced LLMs, even if competitors manage to replicate these models with less expensive chips.

Image source: Getty Images.

Valuation Insights: Is There Room for Growth?

Nvidia’s forward price-to-earnings (P/E) ratio stands at 29, which is quite reasonable for such a rapidly growing company. For comparison, the average forward P/E for the Nasdaq-100 is 31, with few members showcasing growth comparable to Nvidia’s.

However, given its $3 trillion market cap, the company may struggle to deliver explosive returns moving forward, particularly if AI hardware spending trends downwards over time.

It seems Nvidia’s days of monumental growth may be behind it, prompting investors to look for emerging opportunities within the AI space.

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*Stock Advisor returns as of February 3, 2025

Randi Zuckerberg, former market development director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is on The Motley Fool’s board of directors. John Mackey, previous CEO of Whole Foods Market (an Amazon subsidiary), also serves on the board. Suzanne Frey, an executive at Alphabet, is similarly a board member. Will Ebiefung holds no positions in any mentioned stocks. The Motley Fool owns and recommends Alphabet, Amazon, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.

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