With shares skyrocketing by an impressive 63% this year, Nvidia (NASDAQ: NVDA) remains on a thrilling ride on the artificial intelligence (AI) wave that propelled its shares by nearly 240% in the past 12 months alone.
The exceptional fourth-quarter results further underscore the company’s substantial short-term momentum. But what lies on the horizon over the next half-decade? Let’s delve into how new business ventures and valuation considerations could mold the future trajectory of this iconic chipmaker.
The Impressive fourth Quarter Earnings
Nvidia’s earnings have transformed into significant events for tech investors due to the chipmaker’s pivotal role in the burgeoning AI industry. Its operational results often provide crucial insights into the overall state of the sector. On this occasion, the company delivered in style.
Fourth-quarter revenue surged by an astounding 265% year over year to $22.1 billion (a 22% increase sequentially) primarily driven by sales of its leading-edge graphics processing units (GPUs) for training and executing AI applications.
Of particular note, Nvidia’s gross margin of 76% (a 12% rise year over year) remains exceptionally high for a hardware firm. These margins suggest that the chipmaker continues to wield substantial pricing power despite mounting competition from rivals like Advanced Micro Devices, which recently introduced its new MI300 family of AI chips.
Exploring New Business Horizons for Continued Growth
While the AI chip industry is still in its nascent stages, with some experts predicting it to be valued at $400 billion by 2027, Nvidia may need to diversify its approach in this market. Over time, some of its major data center clients might veer towards developing proprietary chips rather than depending on its expensive third-party offerings. In anticipation of this prospective challenge, management is proactively taking various measures.
Image source: Getty Images.
In February, Nvidia unveiled a $30 billion investment in a new business unit dedicated to assisting cloud computing clients in creating customized chips. This strategic move could empower Nvidia to leverage its economies of scale in addressing the market for niche use cases that are underserved by its general-purpose chips like the H100 and A100.
Furthermore, Nvidia is placing its bets on software through its supercomputer DGX Cloud, intended to aid clients in developing and running AI applications without the hassle of constructing their own infrastructure. These diversification endeavors collectively position the company to sustain its remarkably high growth trajectory amidst mounting competition.
Assessing Stock Affordability
Nvidia stands as one of the most compelling companies globally for investors. It boasts a robust economic moat in a high-margin opportunity while future-proofing its business by venturing into synergistic opportunities in custom chips and software. Surprisingly, its shares are still trading at a reasonable valuation of just 33 times forward earnings, slightly above the S&P 500 average of 28.
The primary risk for Nvidia seems to be if the AI industry fails to meet its lofty expectations. Nonetheless, there are presently no indications of such a downturn. Those who acquired shares near the lows in 2023 might want to consider cashing in some profits. However, overall, the stock presents itself as a long-term investment opportunity.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
