Many investors consider Nvidia (NVDA -0.29%) the ultimate artificial intelligence (AI) stock for two solid reasons: The company dominates the AI chip market and has turned this leadership into explosive revenue growth. As a result, Nvidia stock has soared in recent years. Just in 2024, it's climbed more than 70%.
Even though all of this sounds fantastic, it's reasonable to hesitate for a moment before hitting the buy button right now. It's important to consider the long-term picture and determine whether Nvidia can maintain its massive lead -- and continue translating this into earnings growth.
After all, rival chip companies such as Advanced Micro Devices and Intel are releasing better and better chips and could gain ground in the market. Is Nvidia still a buy?
Image source: Getty Images.
From video games to AI
First, let's talk about why Nvidia is such an AI giant. The company started out primarily serving the video game industry with its graphics processing units (GPUs). These chips' ability to handle multiple tasks simultaneously produced all of the spectacular effects on the screen that gamers appreciated. And it became clear this ability could be valuable in many other areas -- including AI.
Nvidia created the parallel computing platform CUDA to adapt GPUs to general computing, and in recent years, the company's business in AI took off. Today, Nvidia still serves the gaming industry, but its AI revenue far surpasses gaming revenue. In the most recent quarter, data center revenue, which includes the AI business, soared 400% to more than $18 billion, while gaming revenue rose 59% to $2.9 billion.
Today, the company holds more than 80% of the AI chip market, with its chips and other related products and services available through the biggest cloud providers. Rivals are going after Nvidia, though. They're introducing new chips at a lower cost that could offer the company a run for its money.
For example, Intel recently announced the Gaudi 3 AI accelerator, which may outperform Nvidia's H100 on certain large language models. And rivals, including Intel and Alphabet as part of a consortium, are developing open-source software to support AI chips from different makers. While CUDA may only be used with Nvidia GPUs, this new open-source software will give customers a choice across chip brands.
Taking market share from Nvidia
This clearly could take some market share from Nvidia, but I'm not overly worried. First, rivals may launch chips that could match or beat Nvidia's H100, but this chip leader isn't standing still. Later this year, the company will launch its Blackwell architecture, which boasts six major innovations including its most powerful chip ever.
It remains well ahead of rivals in the premium chip market, so if customers need top performance, they'll likely turn to Nvidia. And the company continues to innovate, pouring investment into research and development, so it should continue along the path a few steps ahead of its rivals.
Second, there's room in this market for Nvidia to keep growing in leaps and bounds and for rivals to succeed, too, serving customers that don't necessarily need the power of Nvidia's latest GPU. That's because the market is forecast to grow at a double-digit compound annual growth rate to reach more than $1 trillion by the end of the decade. A rival's win isn't necessarily Nvidia's loss.
There's reason to be confident that Nvidia's growth is far from over. On top of that, the stock today looks reasonably priced, trading at 35x forward earnings estimates -- especially considering analysts predict 37% annual growth for the company over the next five years.
All of this means that even after Nvidia's enormous gain, the stock has plenty of room to run. This makes it a buy -- and the ultimate AI stock to hold on to for the long term.
