NVIDIA (NASDAQ: NVDA) The stock has soared recently, up 130% this year and more than 600% over the past three years, all as Nvidia has transformed itself from a company that primarily serves the video game industry into one essential to the development of artificial intelligence (AI) platforms.
The tech giant makes graphics processing units (GPUs), the chips that traditionally powered the speed and special effects involved in games, and today those chips are also used for critical AI tasks like training and inference on AI models, helping Nvidia's profits grow by triple digits in recent quarters.
However, some investors are wary of buying Nvidia stock today, given the company's significant gains and the fact that rivals are trying to take market share. But from an earnings and stock price performance perspective, I think Nvidia still has room to grow. That's why it remains my top AI stock. Read on to find out more.
Why is Nvidia dominating the AI chip market?
First, a bit of background: It's important to understand why Nvidia dominates the chip market. The company has the advantage of being first to market with GPUs, but that's not all: Nvidia's GPUs are the fastest, making them the gold standard for potential customers looking to build an AI platform.
Nvidia doesn't stop at GPUs. The company offers a wide range of products and services, including an entire enterprise software platform, to help customers jumpstart their AI projects. Finally, Nvidia offers its products through all of its public cloud services, making it very easy for potential customers to access the products that Nvidia offers.
Now, going forward, I am optimistic that Nvidia will continue to dominate. This will lead to further revenue growth and a higher stock price. There are two main reasons. The first is Nvidia's focus on research and development. The company has set a goal of updating its GPUs every year, and if it can achieve that goal, it has a good chance of consistently delivering the best performing chips on the market.
for example, Intel The company recently announced that its new Gaudi 3 AI accelerator could outperform Nvidia's current top-performing H100. But Nvidia is preparing to release a more advanced chip, the H200, later this year with an entirely new architecture called Blackwell that will be the company's highest-performing chip yet. This suggests that rivals may catch up with Nvidia's current top-performing chip, but Nvidia is likely to bring an even better product to market soon after.
The early stages of AI
Second, AI development is currently in its early stages, with analysts predicting the market will be worth more than $1 trillion in 10 years. That's why NVIDIA CEO Jensen Huang is committed to leading this development. One example is what Huang calls sovereign AI: the ability for countries to use their own data and infrastructure to create AI — AI tailored to their own needs.
Huang spoke about the importance of this at the World Government Summit in Dubai earlier this year. And in NVIDIA's recent earnings call, the company said it's beginning to generate revenue for sovereign AI from sales of AI products and services. The company predicts sovereign AI revenue could reach “single-digit billion dollars” this year, up from zero last year. That means NVIDIA is leading the way when it comes to finding new streams of AI revenue.
NVIDIA's valuation
Now, let's talk valuation, which is where investors turn to cheaper rivals like Intel. NVIDIA trades at 42 times forward earnings, while Intel is at just 27. At these levels, Intel is a solid trade and I would buy shares in the company, as it has the potential to gain AI market share and gain an advantage with its plans to open up chip manufacturing to others.
However, my top AI stock to hold for the long term remains Nvidia for the reasons I mentioned above, which make the stock well worth it at today's price. Sure, Nvidia has skyrocketed in recent years, but that doesn't mean the opportunity to profit is over. If the company continues to develop AI projects as rapidly as it has recently, Nvidia and its investors should continue to reap benefits over the long term.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Intel and recommends buying January 2025 $45 calls on Intel and selling May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Here's why NVIDIA remains my top artificial intelligence (AI) stock.This was originally published by The Motley Fool.
