Where will Nvidia stock be in 3 years?

Long term investment is one of the keys to sustainable returns in the stock market. This strategy ignores near-term volatility, giving the company's fundamentals time to shine.

With shares up nearly 20,000% over the last decade, NVIDIA (NASDAQ:NVDA) An excellent example of these principles. Let's see if the chipmaker has enough firepower to continue beating the market over the next three years.

Best Artificial Intelligence (AI) Stocks

it's hard to imagine better AI company, compared to Nvidia, is the top manufacturer graphics processing units (GPU) are needed to train and run these complex algorithms. Business is booming, with fourth-quarter revenue rising 265% to $22.1 billion and profits rising 769% to $12.3 billion.

While rivals can sometimes rival Nvidia's products in raw performance, it protects its position through CUDA, a programming platform and software solution optimized for Nvidia hardware.

Despite these strong fundamentals, the stock trades for a forward price-to-earnings (P/E) multiple of only 37. This valuation is marginally higher than nasdaq 100 Average of 29 but much cheaper than comparable chipmakers Advanced Micro Devices, Its P/E is 43, despite revenue growing only 2% to $5.47 billion in its most recent quarter. Make no mistake about it, Nvidia stock is cheap.

Why is the market discounting Nvidia?

It appears that Nvidia's risks don't have much to do with the company itself. The chip maker has successfully built a moat around its GPUs and gained a technological edge over rivals. And it's expanding its addressable market through software and a massive push into custom chips for customers.

It seems that the company has done everything right in the AI ​​chip market. That said, it has become worryingly overexposed to this one industry.

In the fourth quarter, the data center segment (which is dominated by AI GPU sales) generated $18.4 billion, or 83% of total revenue. And the company's gaming segment – ​​previously its core – is now barely making headway, with sales of just $2.8 billion. The worsening lack of diversification makes it uncomfortably vulnerable to changes in the consumer market for AI.

A person looking closely at a computer screen with stock information A person looking closely at a computer screen with stock information

Image Source: Getty Images.

As the AI-related hype begins to fade over the next three years, companies will need to generate enough earnings and cash flow to justify their billions of dollars are spending On Nvidia's AI hardware.

According to Washington PostAI chatbots like ChatGPT lose money on every query due to the high cost of building and operating large language models (LLM).

Another challenge will come from open-source AI platforms like Elon Musk's Grok, which allow anyone to build projects on its source code for free – potentially destroying the profit potential in the industry. All of this could make it less financially attractive for Nvidia customers to continue spending so much on its high-priced GPUs.

How will Nvidia perform in the next three years?

With its high growth rate and reasonable valuation, Nvidia could continue to outperform the market over the next three years. And in the very long term (think decades), the chipmaker's technological edge in GPU design could help it expand into more industries like automaking or virtual reality, which could fix its problem with a lack of diversification. . That said, investors buying the stock now will face near-term risks if the AI ​​industry doesn't do the same According to Expectations.

Should you invest $1,000 in Nvidia now?

Consider this before buying stock in Nvidia:

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Will Abifang has no positions in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

Where will Nvidia stock be in 3 years? Originally published by The Motley Fool

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