Nvidia (NVDA -4.69%) is one of the S&P 500 index’s top performers so far this year, heading for a gain of nearly 180%. The stock even reached its highest ever in recent days. This isn’t surprising considering Nvidia’s dominant position in the high-growth artificial intelligence (AI) chip market. Nvidia’s graphics processing units (GPUs) are the fastest around, and customers have flocked to the company for these chips as well as a broad variety of other AI products and services.
All of this has equaled mind-boggling earnings growth for Nvidia. The company has reported quarter after quarter of triple-digit revenue and profit gains. And it looks as if this is set to continue, considering a key product launch on the horizon and outsize demand for that and other Nvidia products.
Does this earnings momentum and future potential mean you should buy Nvidia at the high — or is it time to approach this top AI player with caution? Let’s find out.
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The go-to tool for AI
First a bit of background on Nvidia. The company has progressively increased earnings over time, initially focusing on the video game market and then broadening its reach into other industries. The AI boom helped earnings truly take off, as Nvidia’s GPUs emerged as the “go-to” tool for crucial tasks such as the training and inferencing of models.
As a result, Nvidia’s recent quarterly revenue surpassed the company’s annual revenue as recently as fiscal 2023. And in the latest quarter, Nvidia reported record revenue of $30 billion, with 87% of that coming from the data center business. (Data center includes Nvidia’s AI activities.)
Looking ahead, great potential exists for more growth, and this is thanks to a launch on the horizon as well as Nvidia’s ongoing focus on innovation. The company has developed a new architecture known as Blackwell along with its highest-performance chip ever and five other game-changing innovations. The company says it plans on ramping production in the fourth quarter and expects “several billion dollars” of revenue to start flowing in during the period.
Nvidia has reason to be so optimistic because demand for Blackwell has surpassed supply even as the company works day and night to try to keep up. And the tech giant expects this trend to continue into next year. At the same time, demand for earlier architecture, Hopper, remains strong as well. This should result in solid revenue growth in the coming quarters.
Nvidia’s annual innovation
And this should extend well beyond the launch of the new Blackwell architecture thanks to Nvidia’s pledge to update its chips on an annual basis. So, if Nvidia follows that plan, it suggests the company won’t be in a position of weakness, and instead will continue building on its strengths before rivals have the time to catch up.
Of course, there’s always the possibility that a new player will come up with another way of powering AI tasks — and this could threaten Nvidia’s dominance. For example, Cerebras Systems, a company planning an initial public offering, has launched a technology that could rival Nvidia’s GPUs. But, even if this and other small companies have a promising product, it won’t be easy to upset Nvidia’s leadership position. Nvidia has spent years winning the confidence of its customers by delivering top-performing products — so they may not easily switch to a younger rival with a shorter track record of success.
Should you buy Nvidia?
Now, let’s get back to our question. Should you buy Nvidia at the high or view the stock with caution? I favor buying at the high for a couple of reasons. First, Nvidia may have reached a record high, but the stock still remains reasonably priced considering the company’s track record and long-term prospects. It trades for 48x forward earnings estimates.
Second, since we are looking at this investment through a long-term lens, it means we’ll hold on for at least five years (and possibly much longer). And in that time period, it’s very likely Nvidia stock will head higher thanks to demand for its products, its innovation, and overall growth in the AI market.
So, I don’t think that, here at this record level, Nvidia has reached its full potential. And that means there’s reason to be optimistic about this top AI player and buy and hold for the long run.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
