Predicting where any company will be 10 years in the future isn’t an easy task. A decade ago, there were no companies with $1 trillion market caps — the largest came in at around $500 billion. Now, there are six companies with 13-digit valuations in the U.S.
Predicting a company’s future becomes even more difficult when it’s involved with an explosive trend such as artificial intelligence (AI). While there may be a risk of a bubble forming, significant business results disprove that view. Nvidia (NASDAQ: NVDA) is at the forefront of this discussion, as its products are critical in this area. However, the company saw a dramatic rise in its stock price, and there’s now a lot of optimism baked into it.
Unprecedented Revenue Surge
Nvidia’s GPUs (graphics processing units) are the best-in-class hardware for supporting AI workloads. GPUs were originally made to provide the fast processing required by video game graphics, but their ability to handle intense calculations made them popular for running other workloads. Interest in AI grew rapidly in the past year and a half as businesses and consumers became intrigued by generative AI, and rising demand meant a need for supercomputers and server installations capable of processing these workloads. Fortunately for companies like Nvidia, these supercomputers must feature thousands of GPUs, ushering in a significant revenue stream for the company.
This new demand caused Nvidia’s revenue to skyrocket over the past few quarters. However, the growth is far from over. For the fourth quarter of its fiscal 2024 (which ended in late January), management guided for revenues of about $20 billion. When Nvidia reports its Q4 results on Feb. 21, all eyes will be on its next revenue guidance as investors seek assurance that it can continue growing at these incredible rates.
The Price Tag and the Future
Much of Nvidia’s rise is based on its anticipated future growth. The company’s trailing price-to-earnings (P/E) ratio is an absurdly high 95. However, when its forward earnings ratio (based on analysts’ growth estimates) of 35 is considered, the stock doesn’t look nearly as expensive. Nvidia’s valuation doesn’t seem so bad when compared to other tech giants.
But the elephant in the room is that Nvidia is a hardware company. Unlike software, which is largely sold as a service and a regular subscription, hardware is usually a one-time purchase to be used until it’s necessary to replace or upgrade. With the recent rush to build out AI computing infrastructure, there’s been a significant diversion from the expected growth path of the GPU market. The market could be pulling forward some of the revenue predicted for future years.
However, the future remains bright as research predicts a massive market for GPUs that hasn’t been tapped yet, possibly yielding $773 billion in GPU sales by 2032. As Nvidia’s stock is likely to fluctuate, the long-term growth potential remains a market-crushing opportunity, despite the occasional downturns.
- Nvidia’s annual revenues will fall at some point because of initial demand fulfillment.
- Revenues will ramp up again once new GPU technology is invented or product demand increases.
Though the timing of these predictions remains uncertain, experts expect GPU usage to increase, making a sensible case for owning Nvidia shares, even at a high price. While Nvidia’s stock will likely experience volatility, the potential for long-term growth is there, allowing it to be a market-crushing stock in the future.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 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.
