Nvidia stock has soared over 125% in 2024.
Over the last 18 months or so the capital markets have kicked into a new gear thanks in large part to the technology sector's interest in artificial intelligence (AI).
Among AI's hottest opportunities are the "Magnificent Seven" -- a moniker used to collectively describe mega cap tech businesses Microsoft, Meta, Apple, Tesla, Amazon, Alphabet, and Nvidia (NVDA -5.12%).
At the moment, Nvidia is arguably playing the most important role in the AI revolution as the company's graphics processing units (GPU) remain in high demand and are a key feature of countless generative AI applications.
But with shares of Nvidia soaring over 125% in just the last 12 months, it's reasonable to wonder how much higher the stock can go.
Let's explore the current state of Nvidia's business to get an understanding of why the stock has moved up so sharply. Moreover, a thorough analysis of the competitive landscape in the chip and data center space will help shed light on where Nvidia shares could be headed.
Nvidia dominates the chip market, but...
Right now, Nvidia's H100 GPUs are used by some of the world's largest companies to help train sophisticated large language models (LLMs) and even help develop autonomous driving software. The company augments the H100 chip line with sibling GPUs known as the A100 and Blackwell series, and are currently developing successor chips known as Rubin.
Given this rapid pace of innovation, it's not surprising to see Nvidia's revenue soar to new heights.
NVDA Revenue (Quarterly) data by YCharts
What is a little bit unique, however, is that it's not just sales that are soaring for Nvidia. The company's impressive roster of chips and data center services has given it an edge over the competition. For this reason, Nvidia has attained strong pricing power, which is directly leading to meaningful margin expansion and accelerating profits.
How long can Nvidia keep the lead?
While the financial profile above looks great, smart investors understand the dynamics of supply and demand.
Considering Nvidia outsources heavily to Taiwan Semiconductor to actually manufacture its GPUs, there is some underlying execution risk. In other words, if Taiwan Semiconductor's capabilities cannot keep pace with demand trends, Nvidia could face an unwanted backlog jam.
This dynamic creates an opportunity for competitors to emerge and offer alternative solutions to customers that were waiting in line for Nvidia products.
As far as direct competition is concerned, both Advanced Micro Devices and Intel are seen as emerging forces in the GPU realm. With that said, I think it will take some time for AMD's MI300X chip and Intel's Gaudi 3 GPU to gain significant traction in the market and start to eat away at Nvidia's dominating performance.
My contrarian take on Nvidia's future is that the company will face significant competition outside of traditional semiconductor businesses. Namely, over the last year Amazon has poured billions of dollars into its AI endeavors -- many of which revolve around chip development.
Amazon invested $4 billion into an AI start-up called Anthropic to help accelerate growth in its cloud computing business. As part of the deal, Anthropic is training its AI models on Amazon's homegrown Trainium and Inferentia chips. Moreover, earlier this year Amazon revealed its plan to invest $11 billion into data centers in Indiana.
Another Magnificent Seven company looking to make waves in the chip space is Meta. Interestingly, Meta is currently a customer of Nvidia.
However, the company has been hard at work developing its own chip, called the Meta Training and Inference Accelerator (MTIA), as a way to keep most of its tech stack in house and migrate away from external sources.
Image source: Getty Images.
Where could Nvidia stock be five years from now?
The chart below shows Nvidia's stock trend over the last 10 years. While it's historically been a good stock to own, clearly there have been some outsized gains in just the last two years.
While I do not think Nvidia is facing an existential crisis by any means, I do think investors need to be considering the long-term implications of rising competition as well as the dynamics of the chip industry.
Demand for semiconductors tends to be cyclical. Although Nvidia does have other opportunities in AI-powered software, these products are meant to be used in tandem with its GPUs. For these reasons, I would not be surprised to see a slowdown in Nvidia's business at some point. This could lead to compressed margins and decelerating cash flow growth.
By contrast, I think big tech businesses such as Amazon and Meta have an interesting opportunity to enter the chip space and gain ground on Nvidia all while being diversified enough to generate growth from other business segments as well.
As Nvidia continues to mature as a business, I think it's natural that its growth will eventually become more protracted. For these reasons, I think there is a good chance Nvidia stock's returns will normalize over the coming years and could be outmatched by other opportunities among mega-cap tech.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
