It was a whirlwind for that Nvidia (NASDAQ: NVDA) shareholders of the past year. Recent developments in artificial intelligence (AI) have been a game changer for the company. The company’s graphics processing units (GPUs), originally developed to generate realistic visuals in video games, have become the gold standard for generative AI, catapulting Nvidia into the stratosphere. Since the beginning of last year, the stock has risen almost 800%.
As a result of the rising share price, the company unveiled plans for a 10-for-1 stock split on May 22, pushing the shares to new heights. Since the announcement, the stock has risen 25%, adding nearly $1 trillion to its market cap. The stock split was completed earlier this week, and in the aftermath, investors are rightly wondering what’s next.
Let’s take a look at the markets Nvidia serves, what opportunities still exist, and how this could impact the company now that the stock split is in the rearview mirror.
Back to where it all started
While AI is getting all the attention right now, it’s important to go back to where it all started. Nvidia invented the GPU in 1999, which revolutionized the gaming industry.
Before their introduction, graphics cards produced images that were simple and rudimentary. GPUs represented a paradigm shift in the gaming industry, thanks to parallel processing, which can perform a large number of mathematical calculations simultaneously. This resulted in images that were much more complex and lifelike, heralding a new era in the gaming industry.
There’s no shortage of competitors, but Nvidia remains a leader in the industry it pioneered. It had a dominant 88% share of the discrete desktop GPU market in the first quarter of 2024, according to Jon Peddie Research.
The gaming industry has suffered a historic slump in recent years, pressured by the economic downturn and the ongoing battle against inflation. The amount of pent-up demand is palpable, which will likely result in a significant upgrade cycle in the coming years.
According to Precedence Research, the global video game market is estimated to grow from $248 billion in 2023 to $665 billion in 2033. As the leading supplier of gaming GPUs, Nvidia is poised to reap the benefits of that growth.
Artificial intelligence is not new
While generative AI made waves last year, AI has been around for decades. Nvidia CEO Jensen Huang saw the writing on the wall and focused the company’s resources in 2013 on developing advanced AI machine learning solutions. It turned out that the parallel processing that helped render lifelike images in video games worked just as well. in accelerating the process of AI training and inference, and Nvidia pivoted to embrace this emerging technology.
That early move was prescient. Nvidia is the undisputed leader in chips used in machine learning, with a dominant 95% of the market, according to New Street Research.
Nvidia’s expertise in developing state-of-the-art AI processors set the stage for the company’s current rampant success in the generative AI market. In fiscal 2024 ending Jan. 28, Nvidia’s data center segment, which includes AI processors, rose 217% to $47.5 billion.
The vast majority of generative AI processing takes place in data centers, with estimates suggesting that Nvidia has 92% of the data center GPU market, according to IoT Analytics.
Data centers have scrambled to upgrade their capabilities to meet the growing demand for generative AI, resulting in unprecedented demand for Nvidia’s high-end AI processors. It’s unlikely the company will continue to generate triple-digit growth for much longer, but that doesn’t detract from the opportunities that remain.
The vast majority of generative AI processing takes place in data centers and the industry is in the midst of one of the largest upgrade cycles ever, according to bank of America analyst Ruplu Bhattacharya. He estimates that the market will grow 50% annually over the next three years. This suggests that the data center upgrade cycle will continue, which will continue to benefit Nvidia.
It is still too early for the adoption of generative AI. One of the more conservative estimates comes from Bloomberg Intelligence, which puts the size of the generative AI market at $1.3 trillion by 2032, up from just $40 billion in 2022. That represents a compound annual growth rate of 42% and illustrates that Nvidia’s growth spurt is far from over.
There’s much more to come
While the majority of Nvidia’s revenue currently comes from AI, data centers and gaming, the company has dabbled in several other markets that could contribute meaningfully to results in the future. The largest of these is the automotive segment, which is developing solutions for the self-driving car market. Although that market has not yet taken off, it could be a game changer in the future.
CEO Jensen Huang has continued to push the boundaries of this technology, developing new and exciting use cases for the humble GPU and never slowing down in his relentless pace of innovation. Last year, the company spent nearly $8.7 billion on research and development, or more than 14% of total revenue. This has helped Nvidia stay light years ahead of the competition.
There is the issue of valuation, which has become a bit complicated. Nvidia currently trades for 49 times forward earnings, compared to a multiple of 28 for the S&P500. Viewed in a vacuum, Nvidia stock seems prohibitively expensive, but it’s not really an apples-to-apples comparison.
Nvidia stock has grown more than 27,000% over the past decade, while the S&P 500 is up just 238%. Furthermore, as measured by the price-to-earnings-growth ratio (PEG), which takes into account the company’s triple-digit growth rates, Nvidia is remarkably cheap, at a multiple of less than 1, the standard for an undervalued stock. .
Given the company’s many capabilities, industry-leading market position, and track record of growth, I’d say Nvidia stock is a buy. For investors put off by the valuation, I would buy the stock at any sign of weakness.
Should You Invest $1,000 in Nvidia Now?
Before you buy shares in Nvidia, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $808,105!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions at Nvidia. The Motley Fool holds positions in and recommends Bank of America and Nvidia. The Motley Fool has a disclosure policy.
Nvidia’s 10-for-1 stock split is over. Here’s what’s next for the stock. was originally published by The Motley Fool
