The size of Nvidia‘S (NASDAQ: NVDA) The growth of the past three years came as a surprise to most investors. The stock spent most of 2022 selling off along with its tech peers. However, the company once known for its gaming and graphics processing units (GPUs) experienced an unprecedented surge amid the spike in demand for its industry-leading artificial intelligence (AI) chips.
Even factoring in the 2022 pullback, Nvidia stock is up about 560% over the past three years. Given these huge gains, the question now might be what will happen to semiconductor stocks over the next three years.
Understanding Nvidia
Admittedly, it’s often hard to imagine where a company can go once it has climbed to the top of its industry like Nvidia. For all the talk about AI accelerators from AMD, Qualcommand others, Nvidia is the dominant company, and competitor alternatives are unlikely to overtake it anytime soon.
Predicting what the AI accelerator market will look like in three years is speculation. Yet observers know that the data center segment, which develops AI accelerators, now accounts for 88% of Nvidia’s revenue. Three years ago, it wasn’t even Nvidia’s biggest source of revenue.
Moreover, competition is increasing. AMD plans to release its MI325X accelerator in the first quarter of 2025. That still lags behind the release of Nvidia’s upcoming Blackwell accelerator, which is expected to arrive in the current quarter.
Still, Oracle chose AMD’s chips to power the latest OCI Compute Supercluster instance. AMD has also indicated this Microsoft, Metaplatformsand OpenAI have used its AI GPUs in some cases.
Nevertheless, Nvidia still controls up to 90% of the AI chip market by some estimates. Additionally, Nvidia’s CUDA programming language is keeping more users in its ecosystem, a factor that will likely cement its dominance as other companies compete for a place in the AI chip industry.
Nvidia in numbers
That knowledge has sent Nvidia stock into the stratosphere. Revenue for the first half of fiscal year 2025 (ending July 28) was $56 billion, an increase of 171% compared to the same period in fiscal year 2024. However, such growth rates are unlikely to be sustainable, meaning growth will be considerably lower. assuming sales continue to increase.
Nvidia has other challenges when you look beneath the surface. The recent price-to-earnings (P/E) ratio of 62 may seem cheap, considering that Nvidia’s net revenues rose 284% higher in the first half of fiscal 2025 than the same period the year before. Even though analysts only forecast earnings growth of 43% in fiscal 2026, the earnings multiple could continue to look low.
Nevertheless, other valuation metrics could make the most risk-tolerant investors hesitant. Its price-to-sales ratio (P/S) now stands at about 34, about triple AMD’s sales multiple of less than 11. Furthermore, Nvidia trades at an astonishing 56 times its book value, well above AMD on a price-to-price ratio. book value ratio of less than 5.
So as revenue growth slows, investors may start to wonder whether Nvidia stock is still worth its premium. That could put significant pressure on Nvidia’s stock, possibly more than it can recover from over the next three years.
Where will Nvidia be in three years?
Nvidia’s trajectory over the next three years is uncertain, and investors could struggle with this stock as business conditions force the market to come to terms with a very likely slowdown in growth.
Nvidia will likely remain a dominant company in a highly lucrative AI chip industry. This should mean that Nvidia will continue to be a winner for investors who plan to hold the stock for five years or more.
Unfortunately, increasing competition will likely put an end to triple-digit revenue growth, and the company already appears on track for net profit to slow to double-digit levels.
Furthermore, the sales multiple and price-to-book ratio indicate significant overvaluation. So Nvidia could see a slowdown in the near term and possibly three years from now as the stock adjusts to an upcoming slowdown.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Will Healy has positions in Advanced Micro Devices and Qualcomm. The Motley Fool holds positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Qualcomm. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Where will Nvidia stock be in three years? was originally published by The Motley Fool
