Title: Is Investing in Nvidia Stock Now a Lifelong Wealth Builder?
Nvidia (NVDA shedding -3.00%), a beacon of life-changing stock market success, leaves new investors wondering if they've missed the boat. A $10,000 investment in the tech giant ten years ago would now be worth an astonishing $2,947,300. Many of its employees, often rewarded with stock options, have become millionaires thanks to the company's achievements.
However, this lucrative track record may make potential investors apprehensive about joining the party late. Let's weigh the pros and cons of Nvidia's stock to determine if this legendary chipmaker still holds the key to a fulfilling investment journey.
Tremendous growth, yet showing signs of deceleration
Nvidia's third-quarter results demonstrated yet another triumph, with revenue skyrocketing 94% compared to the previous year. This surge was predominantly driven by the data center segment, where Nvidia sells advanced graphics processing units (GPUs) to facilitate artificial intelligence (AI) algorithms. The company boasts a remarkable gross margin of nearly 75%, hinting at a robust economic moat.
Despite the impressive figures, signs of deceleration are emerging. In 2023, Nvidia's third-quarter revenue growth expanded by an staggering 206% over the preceding year. Yet it's expected that the growth pace will slow down as the company tackles increasingly challenging year-over-year comparisons.
Although there aren't any cracks apparent as of now, it's uncertain how much longer Nvidia can sustain its monstrous margins.
The company's competitive edge is protected by software solutions like CUDA, which simplifies AI development on Nvidia chips, potentially making them more cost-effective than rival GPUs. However, the flourishing market for AI-capable hardware might encourage clients to stick with their existing GPUs, delaying massive upgrades to the latest models year after year.
An industry teeming with speculation
Wall Street is excited about the generative AI industry, with analysts at Bloomberg projecting it to expand at a remarkable compound annual growth rate (CAGR) of 42% to reach $1.3 trillion by 2032. This expansion would provide Nvidia's chip business with a plethora of uncharted territories for growth.
The prediction assumes that the AI industry will shift away from its existing emphasis on training and inference hardware and transform into consumer-oriented software applications. Yet, this transformation is proving to be a gradual process.
Currently, Nvidia's primary customers consist of "hyperscalers" that provide the company's GPUs' computing power to start-ups and AI clients as a service. While this intermediary role is lucrative, the actual software isn't as profitable. Illustrative examples include ChatGPT maker OpenAI, which is projected to lose $5 billion this year while generating only $5 billion in revenue. The prospect of sustainable monetization in this industry seems daunting, given the availability of free alternatives like Elon Musk's Grok.
For Nvidia, this issue remains theoretical for now. Major clients like Meta Platforms continue to invest in GPUs, having spent $38 billion on capital expenditures in 2023 and anticipating further substantial expenditures in the following year. However, there's uncertainty about how long investors will tolerate speculative data center expenditures before voicing their concerns.
Is Nvidia stock still the golden ticket?
Despite the complexity surrounding Nvidia, its valuation appears to account for the concerns related to growth and the AI industry's uncertain future. With a forward price-to-earnings (P/E) multiple of 34, shares are a bargain compared to the company's prodigious growth rate.
Nvidia stock is likely to surpass the S&P 500 for the foreseeable future. However, investors should not anticipate a repeat of the exceptional growth witnessed throughout the previous decade.
After seeing Nvidia's impressive growth and financial performances, some investors might consider investing, despite the deceleration signs. In this context, one might ponder, "Should I invest in Nvidia's stock to potentially benefit from its future growth, given its strong financial position and steady revenue streams from the data center segment?"
furthermore, given the predictions of a significant expansion in the generative AI industry, some investors might be eager to invest in Nvidia, hoping to reap the benefits of its growth in this sector. They might deliberate, "Could this be the right time to invest in Nvidia, considering the potential for AI-capable hardware market growth and the company's competitive edge in the field?"
