Nvidia's Stock Outlook Over the Next Five Years

The continual data center refresh cycle is anticipated to fuel ongoing revenue increases for Nvidia.

Nvidia has captured the attention of the stock market with an impressive 80% stock price increase thus far in 2024, despite experiencing fluctuations over that period. This past performance sparks curiosity amongst investors about the company's future trajectory.

Short-term market predictions can be unreliable due to various external factors, such as the Federal Reserve's interest rate policies. Let us instead consider a five-year horizon for Nvidia, focusing on business execution over market whims.

High Demand for Nvidia's GPUs

The swift ascendancy of Nvidia has been linked to the burgeoning field of artificial intelligence (AI), which necessitates substantial computing power. Nvidia's GPUs, or graphics processing units, are integral for AI model training because they support parallel computations. With companies purchasing these GPUs in bulk, Nvidia has seen significant financial benefit.

However, the longevity of this demand is uncertain as GPUs are continually subject to innovation. Nvidia's current flagship GPU, the H100, priced at around $30,000, will eventually become outdated, paving the way for newer, more efficient models and triggering another round of upgrades. Currently, Nvidia's GPUs are the favored choice, which creates a cost barrier to switching for customers using them.

Data from the Uptime Institute in 2022 revealed that 33% of organizations refresh their servers every five years, indicating potential growth in the duration of the upgrade cycle. Yet, rapid advancements in AI could potentially accelerate the refresh rate for GPUs dedicated to AI model development.

Stock Valuation

Nvidia's stock pricing has risen considerably, but this is attributable to the company's promising prospects rather than just its current fiscal value. The price-to-earnings (P/E) ratio helps investors assess the stock's value, but due to Nvidia's ever-evolving nature, forward earnings projections are a more suitable metric. These projections are based on analyst estimates for the coming year despite some inherent limitations in prediction accuracy.

With Nvidia trading at 35 times forward earnings, it commands a premium over the broader S&P 500 index, which is valued at 21 times forward earnings. The company's prospects for revenue growth, coupled with the anticipated expansion of the GPU market — estimated to be worth nearly $800 billion by 2032 — justify this premium. Having generated $61 billion in revenue the last fiscal year, Nvidia appears well-positioned for further growth.

Therefore, while Nvidia's stock may seem costly now, a five-year investment horizon could prove lucrative, especially if investors are prepared for potential market corrections.

Nvidia, stock, growth