It's difficult to overstate the impact artificial intelligence (AI) will have on the world in the coming years. While AI has been around in one form or another for decades, the latest developments have the potential to move the needle in ways we can't yet imagine.
Generative AI has demonstrated the ability to create original text, images, and audio, but its potential goes far beyond that. When properly trained, these systems can summarize and draft emails, create presentations, search for and compile data, and even draft and debug complicated computer code.
Goldman Sachs Research has crunched the numbers, and its estimate is jaw-dropping. As AI works its way into business systems and society in general, it could be worth as much as $7 trillion over the next 10 years.
While there are bound to be many beneficiaries, one company well-positioned to reap its portion of this AI windfall is Nvidia (NVDA 1.27%).
Image source: Getty Images.
A prescient pivot
To understand how the company got to where it is today, it's important to take a step back. Nvidia originally made its fortunes by pioneering the graphics processing units (GPUs) that created lifelike images in video games, revolutionizing the industry.
The underlying technology that made this possible is parallel processing, which can process a magnitude of mathematical calculations simultaneously by breaking big jobs into smaller, more manageable bits. Nvidia began to see the potential and quickly adapted this process to other applications.
The humble GPU has evolved far beyond video games. It now speeds data through the ether, processes information in data centers and cloud computing, and enables the latest advances in AI.
Nvidia's market opportunity is growing by leaps and bounds, increasing with each new use case. Early last year, management estimated the company's total addressable market at about $1 trillion -- and that was before the adoption of generative AI really kicked into high gear. This suggests that the number is even higher now.
The need for data centers that can harness the power of AI has caused a building boom that's only just begun. Bernstein analyst Toni Sacconaghi suggests that the AI server market will grow 75% annually over the next three years, calling the buildout "unprecedented."
This robust demand is clear in Nvidia's results. In its fiscal 2024, revenue soared 126% year over year to $61 billion, while its diluted earnings per share (EPS) of $11.93 marked a 586% surge. Nvidia's data center segment, which includes chips used for cloud computing and AI, was the star of the show -- generating record revenue of $18.4 billion, a 409% increase.
For its fiscal 2025 first quarter, which ends April 30, Nvidia is forecasting record revenue of $24 billion, up 234% year over year. Management was clear that it was the rapid expansion of generative AI was driving the growth.
Just last month, Nvidia unveiled its latest AI workhorse -- The Grace Blackwell GB200, which it called the "world's most powerful chip" for AI. It offers five times the performance of the H100 and cements Nvidia's technological lead in the space.
Given Nvidia's technology forms the foundation of AI processing, the company is fueling the AI revolution.
Competing from a place of strength
One of the biggest risks the bears cite is the coming competition, but Nvidia's relentless pace of innovation has kept its rivals at bay. The company has an estimated 95% share of the data center market, according to CFRA Research analyst Angelo Zino, so Nvidia has a strong foothold.
Furthermore, data center demand is expected to double by 2030, according to a report by commercial real estate advisory firm Newmark Group. Estimates suggest it took more than 10,000 Nvidia chips to train Chat-GPT in 2022, and newer versions will require even more. This illustrates why demand for Nvidia's gold-standard AI processing chips should remain high.
Nvidia is also the undisputed leader in machine learning, an earlier and well-established branch of AI. Nvidia controls roughly 95% of the market, according to data compiled by New Street Research.
Data centers are inextricably entwined with AI technology, and Nvidia has a commanding lead in both. While there's always the potential a rival could develop a more powerful or cost-effective AI solution, Nvidia's years of experience suggest it will be difficult to dislodge.
You get what you pay for
Another issue raised by Nvidia bears is the company's valuation. The stock is selling for 68 times earnings and 33 times sales (as of this writing), which will likely cause some investors to balk. However, the company's long track record of growth and future expectations should be considered. Nvidia stock is currently selling for 32 times forward earnings, only a slight premium to the multiple of 27 for the S&P 500 (^GSPC 0.16%).
Despite its recent pullback, Nvidia is still up nearly 200% over the past year and that's no anomaly. The stock has gained 1,600% over the past five years and 16,910% over the past 10 years.
While investors shouldn't expect that level of gains over the coming decade, one thing is for sure: Nvidia is well-positioned to reap the ongoing windfall resulting from AI and represents a once-in-a-generation investment opportunity.
