There’s a lot to love about the AI chip maker.
One of the biggest investment trends of the past few years has been the opportunity presented by artificial intelligence (AI), and perhaps no company is better positioned to benefit from this secular tailwind than Nvidia. (NVDA 1.51%)The chipmaker has become a poster child for the AI revolution and has taken a top spot in the market for huge growth opportunities.
According to McKinsey & Company, generative AI is expected to benefit the global economy by $2.6 trillion to $4.4 trillion over the next decade, and Nvidia is at the forefront of this trend. This massive opportunity is one of many reasons why investors should buy Nvidia stock like there’s no tomorrow. Let’s look at some other reasons.
Nvidia’s Blackwell AI chip. Image courtesy of Nvidia.
1. Nvidia dominates the data center market
There’s no disputing that Nvidia dominates when it comes to data center graphics processing units (GPUs), but some investors may not realize just how far the company is ahead.
IoT Analytics estimates that Nvidia has about 92% of the data center GPU market, but that estimate is likely conservative. TechInsights goes even further, claiming that Nvidia will have 98% of the data center GPU market by 2023. Estimates vary, but the signs are clear.
Competitors are trying to chip away at that advantage, but Nvidia’s early lead and sustained momentum mean it should remain the clear leader for years to come.
2. The undisputed leader behind early AI
Generative AI has only gained attention since early last year, but AI has been around for decades, and Nvidia has been helping to power these advanced algorithms. For example, New Street Research estimates that Nvidia controls 95% of the market for GPUs used in machine learning (an early version of AI). This experience could soon come in handy.
3. The Advantages of Generative AI
NVIDIA’s deep expertise in the field and dominance in early versions of AI made it a natural choice for developers when generative AI exploded. Developments in the field are moving at lightning speed, making NVIDIA’s market share even harder to pin down. Mizuho analysts suggest it’s between 70% and 95% in AI models. That’s in line with Fortune’s estimates that put NVIDIA’s market share at 80%.
4. Platform Factors
Nvidia’s dominance in the AI and data center markets has been built up over years, but it’s not just the result of the company’s chip process: In 2007, Nvidia introduced the Compute Unified Device Architecture (CUDA), an architectural framework and parallel computing platform that helped developers dramatically accelerate computing applications built on its GPUs.
According to Nvidia, CUDA provides developers with over 300 libraries and 600+ AI models, supporting over 3,700 GPU-accelerated applications. With over 5 million developers across 40,000 companies in this ecosystem, it explains why it’s so hard to “chip away” at Nvidia’s dominance as the development platform of choice for developers.
5. It’s not just about tipping anymore
While its processors form the foundation of the Nvidia empire, it’s not just about chips anymore. The company is gradually moving into adjacent markets, offering complementary products that further enhance the performance of its GPUs. These other opportunities could fuel the next phase of Nvidia’s growth.
For example, Nvidia offers InfiniBand networking solutions, including switches and adapters that reduce latency and speed up network connections, as well as NVLink and NVLink switches that are used to daisy-chain multiple GPUs together to speed up connections and maximize their power. The company also offers its own line of turnkey AI servers and supercomputers.
6. Strong Research and Development (R&D) Spending
Nvidia’s continued dominance of AI chips is no coincidence. The company has a long history of spending heavily on research and development (R&D) needed to maintain its technological edge. In fiscal year 2024 (ending Jan. 28), Nvidia spent about $8.7 billion on R&D, up 18% and representing 14% of the company’s total revenue.
The increased spending is helping the company speed up innovation as well as maintain its technological edge: Earlier this year, Nvidia said it would no longer maintain the traditional two-year cycle of announcing new processors, but would instead release new chips every year.
It was already difficult for rivals to keep up with Nvidia’s breakneck development pace, but it’s going to get even tougher from now on.
7. Don’t forget the games
It almost seems like a footnote at this point, but Nvidia started out as a video game pioneer, as parallel processing, the ability to perform huge numbers of complex calculations simultaneously, revolutionized the industry, turning boxy figures into lifelike images.
Nvidia remains the undisputed leader in the discrete desktop GPU market with 88% share, according to industry analyst Jon Peddie Research, which means it’s losing ground to its competitors, and we don’t see that changing anytime soon.
8. Explosive increase in profitability
The emergence of generative AI early last year and the rapid adoption that has accompanied it has been a huge boon for Nvidia, which is forecasting revenue of $60 billion in fiscal 2024, up 126% from the prior year. This has led to a surge in profitability, with diluted earnings per share (EPS) rising 586% to $11.93.
This trend has continued this year, with revenue of $26 billion in the first quarter of fiscal 2025 (ended April 28), up 262% year over year, and EPS of $5.98, up 629%.
Management expects the growth momentum to continue. The company expects revenue of $28 billion for the second quarter, which it reports on Aug. 28. Analysts’ consensus estimate is even higher, calling for revenue of $28.6 billion. Either way, that’s impressive sales growth, and profits are likely to follow.
9. Shareholder returns are increasing
Nvidia’s recent surge has been a windfall for shareholders — as of this writing, the company’s shares have soared more than 500% in the past three years — but there are other benefits for investors, too.
Coinciding with the company’s quarterly report in May and announcing a 10-for-10 stock split, NVIDIA announced a 150% increase in its dividend, from $0.04 to $0.10. With growth as its focus, dividends hadn’t been a priority for the company in the past, but given the newfound wealth, it wouldn’t be surprising to see further increases in the future.
10. It’s not as expensive as you think
NVIDIA’s stock price surge has come with a corresponding rise in valuation, leading some investors to distance themselves from the company. That’s understandable, given that the stock is currently trading at 74 times earnings and 39 times sales, but that’s only part of the picture. Price-to-earnings (P/E) and price-to-sales (P/S) ratios are among the most widely used valuation metrics, but they also have limitations. These metrics tend to view most high-growth stocks as expensive or overvalued by default.
However, given NVIDIA’s impressive growth trajectory, the company’s forward price-to-earnings growth (PEG) ratio is 0.7, meaning a number below 1 would indicate the stock is undervalued, meaning the stock is not as expensive as it may appear at first glance.
