Now, Nvidia‘s (NVDA -4.18%) Business has been booming for so long that it’s getting boring. Despite better-than-expected third-quarter profits and a booming artificial intelligence (AI) hardware market, the stock is down about 3% at the time of writing.
But how long will this momentum last? Let’s take a deeper dive into what’s going to happen in the next three years have shop.
How good were the returns?
Despite being the world’s largest company with a market capitalization of $3.6 trillion, NVIDIA’s business is still growing like a startup. Third-quarter sales rose 94% from a year earlier to $35.1 billion, beating analysts’ expectations of $33.2 billion. And that momentum was driven by its data center business, which sells advanced products. graphics processing unit (GPU) Run and track AI algorithms.
Nvidia also has incredible pricing power, with gross margins of around 75%. I am keeping it Competition is coming. Management plans to maintain growth through new product releases such as Blackwell-based AI chips, which are expected to offer significant performance improvements over previous generation GPUs.
However, while the results were impressive, investors should note that Nvidia’s growth is slowing. Revenue for the past three quarters increased 122%, 262%, and 265%, respectively. This slowdown will likely continue as the company faces more challenging operating results over the next three years.
The AI industry remains highly speculative
Analysts remain optimistic about the future of the AI industry, with Bain & Company predicting industry revenue will reach $990 billion by 2027, up from just $185 billion last year. are. They believe that as companies move out of the experimental phase and begin implementing AI technology into their operations, huge demand could strain supply chains and cause shortages. If this works, Nvidia’s already Large profit margins can be even higher.
That said, analysts made similar predictions during the dot-com bubble in the early 2000s. And while the Internet was a world-changing success, it did not spread as quickly as expected. There are increasing signs that something similar could happen with AI.
According to The Economist, the disconnect between investor enthusiasm for AI and reality can be unbearable. They report that only 5% of U.S. companies say they use AI in their products or services, and very few AI startups are profitable. Most notably, OpenAI, the creator of ChatGPT, expects to lose about $5 billion this year due to a huge drain on employee salaries and the huge energy costs associated with its operations. large language model (LLM).
Image source: Getty Images.
In the best-case scenario, Nvidia can continue to produce new, more efficient chips that can perform more computational work with less energy requirements. This can potentially reduce the cost of training and running AI models. However, many other variables still exist, such as competition among LLMs, which could leave the software side of the industry at a disadvantage even if operating costs begin to fall.
as a wholethe AI opportunity appears to be much more speculative and uncertain than more optimistic analysts expect.
What will Nvidia’s stock price be like in three years?
Over the next three years, investors should expect Nvidia’s growth and margins to decline as it becomes more realistic about the timeline needed to bring AI technology mainstream. That said, stock valuations appear to have already factored in this headwind. and Future price/earnings ratio At a P/E ratio of 37x, the company’s stock price looks reasonable relative to its explosive growth rate, so the downside potential is limited.
Will Ebifang has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
