A once-in-a-decade AI stock could surge 300% by 2030, expert says
Key Points
Nvidia stock is currently trading at its lowest forward price-to-earnings ratio in the last 10 years. Analysts believe that the company has a strong position in the artificial intelligence market and could potentially become a $20 trillion company by 2030. Its full-stack strategy, which includes both hardware and software, gives it a competitive advantage. Investors are considering whether to buy Nvidia stock now, given its impressive performance and potential for future growth.
Nvidia's Role in the AI Boom
Since the release of ChatGPT by OpenAI in November 2022, Nvidia has been a central player in the artificial intelligence boom. The stock has seen a remarkable increase of 1,340% since January 2023. Despite this, it currently trades around 20 times forward earnings, which is near the cheapest valuation in the past decade.
Morningstar analyst Brian Colello recently noted that Nvidia is "too cheap to ignore," highlighting that there is no sign of a slowdown in AI demand. He also emphasized that the company's leadership in the AI infrastructure market remains secure, suggesting that the market underappreciates its prospects.
Beth Kindig, lead technology analyst at the I/O Fund, believes that Nvidia will be a $20 trillion company by 2030. This prediction implies a significant upside from its current market capitalization of $5.1 trillion, equating to an annual return of roughly 35%.
Nvidia's Market Position in AI Inference
Nvidia dominates the AI accelerator market, with its GPUs being the industry standard for AI training workloads, holding about 90% market share. However, the company is also gaining ground in AI inference workloads, where its market share increased eight percentage points to 74% over the past year, according to The Information.
This development may surprise some, as several of Nvidia's largest customers have developed custom AI accelerators to reduce their dependence on the company's GPUs. However, AI inference is expected to be a much larger market than AI training, accounting for two-thirds of AI workloads today.
Despite the development of custom chips like Google's Tensor Processing Units (TPUs), these have not gained substantial market share as expected. One reason for this could be that custom chips are less flexible and lack a robust software ecosystem.
"Every engineer and every model was trained on Nvidia's ecosystem, including CUDA, the software layer between the chips and the code that contains thousands of prebuilt libraries for splitting workloads among chips, managing memory, and debugging," says Meera Pandit at J.P. Morgan. Overcoming this advantage is not easy.
Full-Stack Strategy and Competitive Advantage
Nvidia's full-stack strategy, which involves developing GPUs, CPUs, and networking equipment, allows it to optimize data center performance and power efficiency in ways rival chipmakers cannot. According to CEO Jensen Huang, this results in the lowest total cost of ownership for Nvidia systems, giving the company an important competitive advantage.
Attractive Valuation and Future Growth
Nvidia reported impressive first-quarter financial results, with revenue increasing 85% to $81.6 billion due to strong demand for data center compute and networking products. Non-GAAP net income increased 140% to $1.87 per diluted share.
Investors have good reason to believe that momentum will continue. The AI infrastructure market is forecast to reach $4 trillion by 2030, up from about $1 trillion today, representing a compound annual growth rate of 36%. With Nvidia gaining market share in inference, the company should be able to match or even exceed this pace.
Wall Street expects Nvidia's adjusted earnings to increase at 45% annually over the next three years. This makes the current valuation of 32 times earnings look cheap. Most analysts who follow Nvidia think the stock is deeply undervalued, with the median target price of $300 per share implying 42% upside from the current share price of $210.
Should You Buy Nvidia Stock Now?
Before making a decision, investors should consider the recommendations from various analysts. The Motley Fool Stock Advisor analyst team identified what they believe are the 10 best stocks for investors to buy now, and Nvidia wasn't one of them. These 10 stocks have the potential to produce significant returns in the coming years.
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