One stock that has been symbolic of this year's tech rally is Nvidia (NVDA -2.31%). The company's chips have been in high demand as a result of growing interest in artificial intelligence (AI). Its shares have tripled this year as the hype behind ChatGPT sent this already popular stock to new heights. But things have cooled in the past three months, as Nvidia's stock is only up around 1%.
A big obstacle may be the stock's valuation. Investors may be worried they missed the boat on this top AI stock and that it's too expensive to buy now. But there's a valid argument for why the stock can still go much higher than where it is now.
Generative AI is still in the early innings
It was about a year ago that ChatGPT entered the mainstream and people started learning about what it can do. From doing data analysis to writing essays and even creating images, AI has made many processes easier. It can generate new things as it gathers more information and data. It learns and adjusts to new information.
The demand is likely to grow over time, especially as companies learn new ways that AI can help their businesses. And that means Nvidia's growth related to AI chips is also in its early stages.
AI chip revenue will double by 2027
A recent forecast from research and consulting company Gartner projects that revenue from AI semiconductors will top $53 billion this year, which is an increase of 21% from last year. And in 2024, it will rise by 26% to more than $67 billion. And by 2027, it will be worth over $119 billion.
Analysts credit the emergence of generative AI for this rapid growth. By 2026, they estimate that more than 80% of enterprises will have used generative AI applications or accessed application programming interfaces that utilize the technology, versus less than 5% that will do so this year.
Is Nvidia's stock still expensive?
Nvidia has a market cap of $1.1 trillion and is now one of the most valuable companies in the world. If you look at its earnings multiple, it seems incredibly expensive at 110. But once you start to look at the future earnings growth, a case can be made that it can still grow much larger in size.
Its forward price-to-earnings multiple, which takes into account analyst expectations for how it will do in the next year, puts it at a multiple of 29. The average stock in the Technology Select Sector SPDR trades at roughly 26 times its estimated future earnings. That's not much cheaper than Nvidia.
And if there is some explosive growth ahead in the AI chip market, that only makes the argument even stronger that Nvidia may not be that expensive, particularly to investors who are willing to hold on for the long haul.
In the company's most recent quarter, for the period ending July 30, revenue of $13.5 billion doubled from the same period last year. And its bottom line was even more impressive, as pre-tax earnings of $7 billion were nearly 15 times the $475 million Nvidia reported in the prior-year period.
Should you buy Nvidia's stock today?
Nvidia is a leading company in the AI chip market, and so it offers investors a great way to tap into those growth opportunities in generative AI. While the stock has been slowing, there can still be much more room for Nvidia's valuation to rise higher in the future. If you're in for the long haul and willing to hang on to the stock for at least five years, it may still not be too late to buy shares of this promising tech company.
