Long-term investing is one of the keys to sustainable returns in the stock market. This strategy neglects short-term volatility, allowing time for a company’s fundamental qualities to shine through.
With stocks up nearly 20,000% over the previous decade, Nvidia (NASDAQ:NVDA) is an excellent example of these principles. Let’s see if the chipmaker has what it takes to continue beating the market over the next three years.
The best artificial intelligence (AI) title
It is difficult to imagine a better AI company that Nvidia, the leading producer of graphics processing units (GPU) needed to train and run these complex algorithms. Business is booming, with revenue up 265% to $22.1 billion in the fourth quarter and profits up 769% to $12.3 billion.
Although its competitors can sometimes replicate Nvidia products in terms of raw performance, it protects its position with CUDA, a programming platform and software solution optimized for Nvidia hardware.
Despite these solid fundamentals, the stock is trading at a forward price/earnings ratio (P/E) of just 37. This valuation is moderately higher than that of Nasdaq100 on average 29 but much cheaper than comparable chip makers like Advanced micro-systems, which has a P/E of 43 despite revenue growth of just 2% to 5.47 billion in its most recent quarter. Do no error on he, Nvidia shares are cheap.
Why is the market giving a discount to Nvidia?
Nvidia’s risks don’t appear to have much to do with the company itself. The chipmaker has successfully created a moat around its GPUs and has a technological lead over its competitors. And it’s expanding its addressable market through software and a massive push toward custom chips for customers.
In the AI chip market, the company seems to have done everything right. That said, it has become alarmingly overexposed to this one industry.
In the fourth quarter, the data center segment (dominated by GPU AI sales) generated $18.4 billion, or 83% of total revenue. And the company’s gaming segment – once its core business – is now barely making a difference with just $2.8 billion in sales. The growing lack of diversification makes it uncomfortably vulnerable to changes in the AI consumer market.
As the hype around AI begins to fade over the next three years, companies will need to generate substantial profits and cash flow to justify the billions they are investing. spend on Nvidia’s AI hardware.
According to The Washington PostAI chatbots like ChatGPT lose money on every query due to the high cost of building and operating major language models (LLM).
Another challenge will come from open source AI platforms like Elon Musk’s Grok, which allows anyone to create projects on its source code for free, which could erode the sector’s profit potential. All of this could make it less financially attractive for Nvidia’s customers to continue spending so much on its high-priced GPUs.
How will Nvidia perform over the next three years?
With its high growth rate and reasonable valuation, Nvidia can continue to outperform the market over the next three years. And in the very long term (think decades), the chipmaker’s technological lead in GPU design could help it expand into more industries like car manufacturing or virtual reality, which could solve its problem of lack of diversification. That said, investors who buy these stocks now face significant near-term risks if the AI industry does not. be up to the task expectations.
Should you invest $1,000 in Nvidia right now?
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Where will Nvidia stock be in 3 years? was originally published by The Motley Fool
News Source : finance.yahoo.com
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