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2024’s Market Surge: Investors Eye the AI Revolution
Optimists looking for an encore performance from Wall Street were handsomely rewarded in 2024. Last year, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all achieved multiple record-closing highs and ended higher by 13%, 23%, and 29%, respectively.
The fuel sparking this rally has been abundant, with strong corporate earnings, a resilient U.S. economy, a decline in the prevailing inflation rate, and Donald Trump’s November victory all playing a role. But at the heart of this rally is the revolution and evolution of artificial intelligence (AI).
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AI is the game-changing technology that’s giving software and systems the capacity to reason, act, and evolve, all without the need for human intervention. PwC predicts that AI could boost global gross domestic product (GDP) by 26% by 2030.
Although AI has greatly benefited much of the tech sector, no company has gained more than Nvidia (NASDAQ: NVDA).
Nvidia’s Skyrocketing Stock Forecasts
In less than two years, Nvidia transformed from a $360 billion company known for its graphics processing units (GPUs) primarily used in PC gaming and cryptocurrency mining into a $3.7 trillion powerhouse at its peak. Its GPUs have become the driving force behind AI-accelerated data centers.
Demand for Nvidia’s popular Hopper (H100) chip and the successor Blackwell GPU has soared. While Advanced Micro Devices sets the price for its Instinct MI300X AI-accelerating chips between $10,000 and $15,000, Nvidia’s Hopper demands $30,000 to $40,000. This combination of high demand and limited supply has enhanced Nvidia’s pricing power and profit margins.
Furthermore, Nvidia’s GPU computing power outpaces that of competitors. The Blackwell GPU is engineered to accelerate computing in areas such as quantum computing and generative AI solutions, all while being much more energy efficient than its predecessor.
Nvidia’s competitive edge also stems from its CUDA software platform, a toolkit designed to help developers maximize the capabilities of their Nvidia GPUs. This loyalty keeps customers within Nvidia’s ecosystem.
The company’s performance has consistently surpassed Wall Street’s expectations. After reporting $27 billion in full-year revenue for fiscal 2023 (ending Jan. 29, 2023), Nvidia is projected to achieve $129 billion in revenue for fiscal 2025. This impressive growth has significantly boosted its operating cash flow and profits.
Given these results, it’s expected that Nvidia’s stock will continue to rise. Among 40 analysts providing price targets, the lowest ($135 per share) suggests a 5% increase from the closing price on Jan. 28. Notably, all 67 analysts who issued ratings on Nvidia recommend buying or holding; none suggested selling.
However, such unanimous positivity might warrant a closer look.
Image source: Getty Images.
Potential Pitfalls for Nvidia Amidst Analyst Optimism
Wall Street analysts are often slow to adjust their ratings, typically reacting after Nvidia announces earnings or shares significantly exceed prior targets. This trend may lead analysts to overlook emerging risks with Nvidia.
A critical issue seems to be that analysts are overlooking a historical pattern: the eventual decline of “next big innovations.” In the early 1990s, the internet fueled growth in business, but it also led to the dot-com bubble, which ultimately resulted in a 78% drop in the Nasdaq Composite’s value at its peak.
Every groundbreaking innovation over the past three decades has needed time to mature. Nonetheless, investors—along with Wall Street analysts—have frequently overestimated the adoption and practical use of new technologies.
Recently, with DeepSeek’s open-source R1 large language model (LLM) making waves, investor fears about rising AI competition surfaced. Yet, the greater concern lies in the reality that most businesses struggle to understand what is required to build and train effective LLMs. Many lack a clear strategy for optimizing AI investments, raising complications, particularly as Nvidia stock is priced high.
Moreover, competition from large tech firms such as Microsoft, Meta Platforms, Amazon, and Alphabet poses a long-term threat as they develop their own AI chips for data centers. Even if inferior compared to Nvidia’s offerings, these alternatives will likely be cheaper and more available.
The end of AI-GPU scarcity is expected to erode Nvidia’s elevated gross margin. NVDA Gross Profit Margin (Quarterly) data by YCharts.
AI-GPU scarcity has significantly benefited Nvidia, more so than the speed of its computing solutions. As this scarcity lessens in the upcoming quarters, Nvidia’s pricing power and gross margins could face substantial challenges.
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Can Nvidia Overcome Geopolitical Challenges and High Valuations?
Geopolitical Tensions Could Impact Nvidia’s Future
Nvidia faces potential geopolitical risks that may be overlooked. As one of Nvidia’s largest markets by net sales, China could be affected by President Donald Trump’s trade policies, which may strain relations between China and the United States, two of the world’s biggest economies. Additionally, tariffs on China or foreign chipmakers could be implemented. This situation follows the Biden administration’s restrictions on AI-GPU exports that started in 2022.
High Valuations Raise Concerns
Both Nvidia and the overall stock market appear to be quite expensive. Last summer, Nvidia’s price-to-sales (P/S) ratio reached 40, a level that has historically been associated with market bubbles in innovative sectors.
Analysts Are Optimistic, but Caution Is Warranted
While every analyst covering Nvidia expects the stock price to rise, there is strong evidence suggesting they might be mistaken.
Is Nvidia a Smart Investment Right Now?
Before making an investment in Nvidia, consider this:
The Motley Fool Stock Advisor team has identified what they believe are the 10 best stocks for investors to buy currently, and Nvidia is notably absent from this list. The selected stocks might offer substantial returns in the years ahead.
Reflecting on Historical Performance
For perspective, remember when Nvidia was recommended on April 15, 2005? If you had invested $1,000 at that time, your investment would have grown to an impressive $758,099*!
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, another subsidiary of Amazon, is also on the board. Randi Zuckerberg, a former Facebook market development director and sister to CEO Mark Zuckerberg, is a board member as well. Sean Williams has stakes in Alphabet, Amazon, and Meta Platforms. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. They also recommend long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool maintains a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
