Predicting the future position of Nvidia's stock in a 3-year timeframe.
Predicting the future position of Nvidia's stock in a 3-year timeframe.
By now, NVIDIA's (NVDA -2.40%) business has been thriving for so long it's starting to feel monotonous. As I type this, shares are dipping by around 3% despite impressively surpassing expectations in the third quarter and a bustling market for AI hardware.
But how long can the good times last? Let's delve deeper into what the following three years might bring.
How impressive were the earnings?
Despite being the globe's largest company with a market cap of $3.6 trillion, NVIDIA's earnings are still soaring, much like a startup's. Third-quarter revenue skyrocketed 94% year over year to $35.1 billion, exceeding analysts' predictions of $33.2 billion. The growth was driven primarily by its data center business, where it peddles sophisticated GPUs for AI algorithm processing.
NVIDIA also boasts remarkable pricing power, with a gross margin hovering around 75%, suggesting it's keeping competitors at bay. Management plans to sustain growth by introducing innovative products like its Blackwell-based AI chips, anticipated to offer significant performance advancements in comparison to previous GPU generations.
Regardless, it's noteworthy that while results were excellent, NVIDIA's growth is decelerating. Sales grew 122%, 262%, and 265%, respectively, in the previous three quarters. And this slowdown is likely to continue as the company grapples with more challenging comparisons in the upcoming three years.
The AI industry remains riddled with uncertainty
Analysts remain hopeful about AI's future, projecting it could generate $990 billion in revenues by 2027 — a substantial leap from the $185 billion in 2021. They believe businesses are transitioning from experimentation to integrating AI into their operations, fueling immense demand and potentially straining supply chains. If these predictions come to fruition, NVIDIA's already-impressive margins could soar even higher.
However, past predictions, like those made during the dot-com bubble in the early 2000s, have sometimes proved unrealistic. While the internet revolution was groundbreaking, widespread adoption took longer than anticipated. Likewise, it seems AI might face similar hurdles.
According to The Economist, the gap between AI investors' enthusiasm and reality could prove unsustainable. They report that only 5% of U.S. firms integrate AI into their products and services, and few AI startups generate profits. Notably, OpenAI, creator of ChatGPT, projects to lose around $5 billion in 2023 due to employee payouts and significant energy expenditure for running large AI models.
In the most optimistic scenario, NVIDIA could manufacture more efficient chips capable of performing more computational work with less energy need, reducing AI model training and operation costs. But there are still several variables, such as competition among large AI models, which could keep the software side of the industry unprofitable, even if operational costs decline.
Therefore, the AI opportunity appears more speculative and uncertain than some analysts acknowledge.
Where will NVIDIA's stock be in three years?
Over the subsequent three years, investors should anticipate a gradual decline in NVIDIA's growth and margins as investors acknowledge the realistic timelines required for mainstream AI technology adoption. While the stock's valuation seems to account for these challenges — with a forward P/E of 37 — there is still some potential for downside, given the strong growth rate.
Given NVIDIA's impressive earnings and the projected growth of the AI industry, it might be wise for investors who are into finance and considering investing in NVDA to closely monitor the company's strategy for maintaining its competitive edge. As the market becomes more mature and comparisons get tougher, NVIDIA's focus on innovation and efficient chip production could play a crucial role in determining its stock performance over the next three years.
In light of the uncertainties surrounding the AI industry, sophisticated investors may find it prudent to diversify their portfolio, ensuring that their total investments are not overly reliant on NVIDIA's stock performance. Maintaining a diverse portfolio can help mitigate potential risks associated with speculative technologies and provide a balance between growth and stability in the long run.