For a significant portion of the previous year, many investors were apprehensive about the potential onset of a recession. However, the Federal Reserve Bank’s decision to pause its interest rate increases has shifted sentiments on Wall Street towards anticipating a so-called soft landing – a scenario where inflation is brought under control without triggering a recession.
Adding to the optimism is the fact that, despite the Nasdaq Composite already experiencing a 43% gain year-to-date (as of the market close on Thursday), historical patterns suggest there might be more to come. Over the past 51 years, in the year following a market recovery, the Nasdaq has, on average, surged an additional 19%, indicating the likelihood of further gains.
Taking the lead this year are the so-called Magnificent Seven stocks, all deeply connected to artificial intelligence (AI), surpassing the broader market significantly:
Nvidia (NASDAQ: NVDA): Up 235%
Meta Platforms: Up 194%
Tesla: Up 107%
Amazon: Up 83%
Microsoft: Up 59%
Alphabet: Up 56%
Apple: Up 50%
While consensus on Wall Street is rare, most market watchers agree that among the Magnificent Seven, Nvidia is best positioned to capitalize on the rapid adoption of AI. Despite the stock’s significant gains this year, there’s evidence to suggest it could continue to outperform in the long term, and surprisingly, the stock may not be as expensive as it appears.
AI is just one facet of a larger puzzle
Taking a step back, it’s crucial to consider the bigger picture. While AI presents a massive opportunity for Nvidia, it’s far from the only one. The company revolutionized the video game market 25 years ago with the introduction of the modern graphics processing unit (GPU), transforming lifelike images and dominating over 80% of the discrete desktop GPU market today, according to Jon Peddie Research.
Nvidia’s success lies in its adaptability, utilizing parallel processing to break down massive computing tasks into more manageable pieces. This ability allowed the company to extend its technology to various lucrative applications, including cloud computing, data centers, autonomous driving, and most recently, AI. The continuous improvement of technology and software has created a lasting economic moat for Nvidia.
The capability to pivot and continually develop new use cases has propelled the stock’s climb of 12,380% over the past decade. AI is just the latest breakthrough in a series fostered by Nvidia’s technology, making its processors the gold standard in numerous applications.
Numbers tell the story
Examining Nvidia’s financial results provides insight into its importance in the AI landscape. In the fiscal 2024 third quarter, the company reported record revenue of $18.1 billion, a 206% YoY increase, with diluted earnings per share surging 1,274% to $3.71. While such exceptional results may not be sustainable, they highlight the accelerating demand for Nvidia’s AI chips.
Nvidia anticipates this growth trend to persist, with a forecasted record revenue of $20 billion for the upcoming fiscal fourth quarter, representing a 230% YoY increase. The company’s bullish outlook is strongly tied to the demand for AI.
Market estimates for the AI sector vary widely, with even conservative projections showing significant potential. The Generative AI market could reach $1.3 trillion by 2032, achieving a compound annual growth rate (CAGR) of 42%, according to Bloomberg Intelligence. Nvidia already holds a dominant position in the machine learning market, with 95%, according to New Street Research.
As the leading provider of various AI solutions, Nvidia stands to gain the most from this secular tailwind.
Expanding in multiple directions
AI is not the sole driver of potential growth for Nvidia.
The gaming market, experiencing a temporary slowdown due to economic headwinds, is expected to rebound. The global gaming GPU market is projected to increase from $2.7 billion this year to $11.7 billion by 2028, with a CAGR of 34%, according to Mordor Intelligence. As the industry leader, Nvidia is poised to benefit from this resurgence.
The ongoing adoption of cloud computing shows no signs of slowing, contributing to increased investments in data centers. The integration of AI into operations by more companies will drive a data center upgrade cycle, and Nvidia, with a 95% share of GPUs in the data center market, is well-positioned to capitalize on this opportunity, according to CFRA Research analyst Angelo Zino.
The data center market is expected to grow from $263 billion in 2022 to $603 billion by 2030, with an 11% CAGR, according to Prescient and Strategic Intelligence Market Research, further highlighting a substantial and profitable opportunity for Nvidia.
With its position as the leading provider of processing solutions for gaming, cloud computing, data centers, and AI, Nvidia’s future appears promising for both the company and its investors.
Addressing Nvidia’s valuation, currently trading at 65 times earnings and 27 times sales, may initially seem exorbitant. However, this does not fully capture an essential factor: growth. The price/earnings-to-growth ratio (PEG ratio), which accounts for growth, is less than 1, compared to more than 2 for the S&P 500, indicating that the stock is relatively cheap when considering its growth potential.
While the demand for generative AI is expected to continue, coupled with Nvidia’s dominant positions in gaming, data centers, and machine learning, it’s evident that Nvidia stands out as the Magnificent Seven stock to consider in 2024, especially if you can only choose one.
Before you invest in Nvidia, it’s worth considering that The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and Nvidia wasn’t one of them. The 10 stocks that made the cut could potentially generate significant returns in the coming years.
Stock Advisor provides investors with a comprehensive blueprint for success, including portfolio-building guidance, regular analyst updates, and two new stock picks each month. The service has outperformed the return of the S&P 500 by more than three times since 2002*.