For decades, big tech has been hunting for the next game-changing technology that could transform people’s lives and add trillions to the global economy. Many think generative artificial intelligence (AI) could be the one. And Nvidia (NVDA -1.01%) has benefited from a surge in demand for its AI-capable chips to power the new industry.
But with its shares up 193% so far in 2024, is it too late for new investors to bet on the company? Let’s dig deeper into what the future could hold.
No shortage of grandiose projections
There is no shortage of grandiose projections for the long-term AI opportunity. Analysts at Bloomberg expect the market to “explode” — growing at a compound annual growth rate (CAGR) of 42% to $1.3 trillion by 2032. In the near term, they expect expansion to come from training and inference hardware for large language models (LLMs). So far, things seem to be moving at an even faster pace than they expected.
With an estimated share of 75% to 95% in the market for AI-capable graphics processing units (GPUs), Nvidia’s hardware business can be used as a proxy for the AI infrastructure opportunity as a whole. And the company’s second-quarter earnings show impressive momentum.
Revenue soared 122% year over year to $30 billion. And this result was driven mainly by a 154% surge in Nvidia’s data center segment, where it sells top-of-the-line chips like the h100 and h200 to cloud computing giants like Alphabet, Microsoft, and Amazon. Demand seems to be dramatically outstripping supply, allowing Nvidia to boast an eye-watering gross margin of 76% and an operating profit of $7.8 billion.
What happens next?
As far as AI hardware is concerned, Nvidia seems to be doing everything it needs to do to remain on top. The company’s high gross margin suggests it has a strong economic moat — an advantage that makes it harder for rivals to compete, even though they are trying.
Companies like Advanced Micro Devices also make AI chips (such as the Mi300n Series) designed as an alternative to Nvidia’s flagship chips. However, Nvidia helps maintain its market share with CUDA, a software solution designed to help clients get the most out of their infrastructure. Developers trained on Nvidia hardware and software have tended to be reluctant to switch to rival providers despite the high prices.
Image source: Getty Images.
The company aims to maintain its momentum with new products, such as its next-generation Blackwell chips designed to dramatically boost AI training speed and efficiency compared to previous models.
What could go wrong?
On the surface, Nvidia is in a perfect position for continued dominance. And the company’s remarkably low valuation is the icing on the cake. With a forward price-to-earnings (P/E) multiple of just 36, shares trade for only a slight premium to the Nasdaq-100 index average of 32. This is a low price to pay for a company growing at a triple-digit rate. However, there are some reasons why investors may want to limit their exposure.
For starters, the vast majority of AI industry growth is coming from infrastructure, not consumer-facing applications (software and services). Until this dynamic changes, Nvidia’s business is on shaky ground.
Furthermore, Nvidia’s cloud computing clients could eventually face shareholder pushback because of their high infrastructure spending with little to show for it. Some are already turning to less-expensive custom chips built by other chipmakers like Broadcom. While Nvidia’s near-term prospects look strong, longer-term investors may want to proceed with caution until some of these challenges are addressed.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.