The stock market has a long history of creating bubbles, especially in the technology sector. However, when push comes to shove Nvidia (NASDAQ: NVDA), the chipmaker’s eye-popping valuation might not actually be a sign of a bubble. Rather, it may reflect a deeper truth about the rapidly evolving state of artificial intelligence (AI).
Nvidia’s stock currently trades at 77.1 times trailing earnings, a lofty valuation by historical standards and rich even for the fast-growing tech sector. This has led some investors to wonder if it’s time to take profits on Nvidia stock. After all, the chipmaker’s shares have risen by as much as 206% in the past twelve months.
However, several pieces of evidence suggest that Nvidia’s growth story is still in its early stages and that AI is on its way to fundamentally changing the world. Here’s a look at five key tailwinds that should push Nvidia stock even higher in the coming years.
Five key themes
First, the general population is largely unaware of the true power of AI. This situation will change dramatically later this year Apple integrates AI into its ecosystem and Amazon aims to make Alexa smarter with AI.
As a broad group of consumers begin to experience the benefits of AI in their daily lives, demand for AI-powered products and services is likely to skyrocket, driving substantial revenue growth for companies like Nvidia, which provide the architecture behind the technology.
Second is the pace of AI development accelerate. The exponential growth of computing power has put humanity on the brink of a series of “Gutenberg moments,” or events that completely upend the status quo.
This accelerating pace of innovation implies that rivals likely won’t have time to challenge Nvidia’s dominant position in AI-enabled graphics processing units (GPU). While competitors like it Advanced micro devices And Intel aim to reduce Nvidia’s dominant market share, the window of opportunity is closing.
Third, the AI arms race between leading US companies, and the US and China more broadly, will not give developers time to create alternative ecosystems.
The race to achieve artificial general intelligence (AGI) is on, and Nvidia’s superchips like Blackwell will likely be the main drivers of this transformation. As companies and countries scramble to gain a competitive advantage in AI, Nvidia’s technology will remain in high demand.
Fourth, the advent of AI will not follow rules set by previous transformational technologies such as the internet or cars. AI has the potential to change human society at a fundamental level, and it will do so in less than five years.
Traditional valuation metrics and historical precedents, in turn, may not entirely apply to pioneering companies like Nvidia.
Fifth, the potential applications of AI are virtually limitless, spanning industries such as healthcare, finance, transportation, and more. As AI becomes more sophisticated and ubiquitous, it will create entirely new markets – many of which are unimaginable today.
Nvidia, with its advanced AI technology and growing customer base, is in the catbird seat.
Key learning points
Nvidia’s current valuation may seem high by historical standards. But it’s important to consider the company’s unique position in the rapidly evolving AI landscape.
With the general population largely unaware of AI’s already incredible capabilities, its ever-accelerating pace of development, and the ongoing arms race, Nvidia should continue to post record-breaking revenue growth in the coming years.
After all, Nvidia’s potential is truly unprecedented as a gatekeeper to a $100 trillion AI-based economy. Seen in this context, the increasing talk of bubbles around the chip maker’s shares seems unwarranted.
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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. George Budwell has positions at Apple. The Motley Fool holds and recommends positions in Amazon, Apple, and Nvidia. The Motley Fool has a disclosure policy.
5 Reasons Nvidia Isn’t in an AI-Powered Bubble originally published by The Motley Fool
