Nvidia’s Impressive AI Growth: What’s Next for This Tech Titan?

Business has exploded for Nvidia (NASDAQ: NVDA) over the past few years, with revenue surging in the triple digits quarter after quarter, and reaching record levels well into the billions of dollars. This is thanks to the company’s position in one of today’s highest-growth markets: artificial intelligence (AI). Nvidia dominates the AI chip market, with 80% share, and also has built an AI empire, selling a wide variety of related products and services to customers.

And that’s helped the stock to skyrocket, gaining 2,400% over the past five years and heading for an annual increase of about 180%. Now, against this backdrop, Nvidia has reached a transition point. Its pace of revenue growth slowed in the recent quarter, and the company is beginning to launch a key product. Investors are carefully watching and wondering if Nvidia, following this big moment, will keep up its momentum or if it’s settling into a phase of slower growth. Want to know what’s next for this AI giant? A look at one key number could offer us some clues.

Image source: Getty Images.

Nvidia’s Ascent in the AI Market

First, let’s check out Nvidia’s path so far, including the recent slowdown. Nvidia’s graphics processing units (GPUs) have emerged as the fastest on the market, making them a key part of AI programs, and this has resulted in major demand from the world’s biggest tech companies.

Players like Meta Platforms, eager to supercharge AI programs, and Amazon, aiming to offer the world’s best AI tools to customers through its Amazon Web Services business, have flocked to Nvidia for its products in recent years. This demand has skyrocketed for the company’s latest offering, the Blackwell architecture and chip. Nvidia described demand as “staggering” in its recent earnings call, noting it exceeds supply.

Despite all this, Nvidia’s revenue growth slowed in the recent quarter, shifting to double-digit growth from the triple-digit figures we’ve seen previously. Before worrying, it’s important to examine the actual revenue numbers. For example, the earlier phases of the AI boom made it easier for Nvidia to report triple-digit revenue growth, rising from about $6 billion a year ago. However, with current revenue exceeding $35 billion per quarter, achieving such growth is becoming increasingly complex. Hence, the slowdown should not be interpreted as an indication of a decline in Nvidia’s performance.

Analyzing Nvidia’s Profitability

Next, let’s evaluate Nvidia’s future using a significant financial metric: gross margin. The company has managed to maintain margins above 70%, indicating strong profitability on its sales.

In the months ahead, however, we might see a slight dip in profitability as Nvidia ramps up production of Blackwell. Though Nvidia’s gross margin has recently been in the mid-70% range, the expectation is for it to decrease to the low-70% range. Even so, this level remains impressive, especially given the complexity involved in rolling out Blackwell.

Blackwell is versatile, featuring several distinct chips and customizable options based on customer needs. Managing the production ramp while meeting the demands of significant tech company clients is currently Nvidia’s priority, and the costs associated with implementing these logistics will affect the profitability of each sale.

Looking Ahead: Nvidia’s Future Prospects

While we should not anticipate maximum profitability immediately, there is good news. Nvidia has forecast that its gross margin may rebound to the mid-70% range, potentially in the second half of next year. This suggests that Nvidia is primed to sustain its high profitability levels. Additionally, strong demand indicates that revenue is likely to continue its upward trend.

While a moderate decline in profitability is anticipated as Nvidia enhances its Blackwell production, this situation appears to be temporary. Long-term, Nvidia aims to maintain the momentum seen in preceding quarters, particularly as customers invest further into their AI platforms. With the current $200 billion AI market projected to reach $1 trillion by the decade’s end, the outlook for this AI powerhouse looks promising.

Investors should concentrate on Nvidia’s long-term potential rather than a possible short-term drop in profitability. Nvidia’s strong track record and the expected gross margin trends are encouraging indicators.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Meta Platforms, and Nvidia. 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.