Nvidia may have the key ingredients for a long-term win.
Nvidia (NVDA 0.78%) The company’s solid track record of triple-digit profit growth has propelled the stock to record highs in recent days. Tech giants have emerged as key players in today’s artificial intelligence (AI) boom, selling everything from the world’s most powerful chips to software and other services to customers.
But despite this impressive performance, some investors are concerned about whether the company can maintain this pace going forward. The risk is that other chip makers could sell cheaper products, eroding Nvidia’s market share and putting pressure on profits, or putting pressure on Nvidia to lower prices, reducing profit margins. That could get worse.
Nvidia’s stock price is on track to rise 176% this year, but such concerns have weighed on the company’s results at times in recent months. Here are three things about Nvidia that naysayers may be ignoring. These factors are likely to ensure a long-term growth story for the company.
Image source: Getty Images.
Nvidia and the AI boom
But before we get into that, let’s take a look at Nvidia’s journey so far. The company started selling graphics processing units (GPUs) primarily to gaming customers, but after realizing the power of these chips to revolutionize other areas, Nvidia expanded into other areas as well. I spread my hands. And as the AI boom gained momentum, Nvidia’s story truly blossomed. This is because GPUs process many tasks simultaneously, making them an ideal tool for performing key AI tasks such as training and inference models.
Nvidia led the way here in the chip market, with an 80% share, but the company has gone a step further and developed a wide range of products and services that power AI from every angle, from start to finish. So customers building AI projects will find everything they need on Nvidia.
As mentioned above, the big concern right now is whether Nvidia can maintain its leadership and sustain growth and stock price appreciation.
Now consider three factors that naysayers may be ignoring. Combined, these could deliver tremendous growth for Nvidia for years to come. These are the company’s gross profit level, growth rate, and focus on innovation.
Nvidia’s incredible gross profit margins
First, Nvidia’s gross margins have remained above 60% for most of the past five years, with recent quarters exceeding 70%. The company recently announced that its gross profit margin for the third quarter is expected to be 75%, and for the full year to be in the mid-70s. This is an astonishing level even in normal times, but it is even more alarming now. That’s because Nvidia is ramping up production of its new Blackwell architecture and preparing to launch the platform, which typically comes at higher costs during product launches and early stages.
NVDA Gross Margin (Quarterly) Data by YCharts
Add to this the triple-digit revenue growth in recent quarters, and even if this drops to double-digit growth, the outlook for growth and profitability remains very positive.
While this is a positive thing, one more element is needed to solidify the chances of long-term success. That brings us to the third factor to consider: innovation. So far, customers have been willing to pay for Nvidia’s innovation and even wait it out. For example, demand for Blackwell exceeds supply, but that doesn’t scare away customers.
Going forward, Nvidia has committed to updating its GPUs annually, making it difficult for other companies to develop faster chips more quickly. Nvidia may be too far ahead of others to catch up. Meanwhile, the semiconductor giant continues to invent algorithms to continue improving its current infrastructure over time, such as the Hopper architecture. This means customers can add to and build on what they already have, as well as integrate new Nvidia products into their systems.
Therefore, Nvidia is likely to keep customers coming back through old and new products, which should keep its growth rate high. Finally, the more a company scales its processes, the more cost-effective it becomes and the wider its profit margins can be.
This combination of solid profit margins and high growth rates allays naysayers’ concerns and supports the idea that NVIDIA stock has more room in the long run.
