If you put $1,000 into Nvidia's (NVDA -0.02%) stock in October 2013, your shares would now be worth roughly $115,000, a return of 11,400% over 10 years. And while the semiconductor maker is now likely too large to maintain that level of growth in the future, it can still reward long-term investors as it pivots to new opportunities in artificial intelligence (AI) technology. Let's dig deeper.
What can the present tell us about the future?
Nvidia is a picks-and-shovels play on AI through sales of its advanced graphics processing units (GPUs). This strategy maximizes its market opportunity while minimizing risk.
The company can benefit from successful and unsuccessful clients because they all rely on its chips to build their platforms. And the impact of this growing demand is already being felt in its most recent earnings report.
Third-quarter revenue hit a record of $13.5 billion, 88% higher than the prior-year period. This expansion was driven by the data center segment, which jumped by 171% as Nvidia enjoyed a massive uptick in AI-related demand for its most advanced enterprise GPUs, which help train and run computationally-intensive AI applications.
Performance in Nvidia's other core segments, like gaming (up 22% year over year) and automotive (up 15%), was less impressive. But this could change over the coming decade.
Investors should keep a close eye on Nvidia's other segments
Nvidia's gaming segment mainly represents sales of its GPUs for personal computers, consoles, and cryptocurrency mining. This once-dominant business has fallen from grace as economic challenges like inflation and rising interest rates encourage consumers to delay these big-ticket purchases or buy lower-cost options in used equipment. The good news is that this industry is cyclical and could eventually bounce back.
Image source: Getty Images.
Over the long term, investors can expect video games to become increasingly GPU-intensive as developers race to maximize graphics and performance.
Graphically demanding technologies like augmented reality (AR) and virtual reality (VR) could also become more mainstream, further supporting long-term demand for Nvidia's chips. In May, the company announced its Avatar Cloud engine, a tool designed to help developers incorporate conversational AI into their games, potentially diversifying its revenue streams in this hardware-reliant segment.
AI could also play a role in Nvidia's automotive business, which aims to pioneer self-driving software as a service. While autonomous driving technology is far from ready today, analysts at McKinsey & Company believe it could generate $300 billion to $400 billion in annual revenue by 2035, a massive potential opportunity for early movers.
How will Nvidia's stock perform?
It took Nvidia 30 years to reach its trillion-dollar market cap. And at its current size, it will have to add an additional trillion in value to generate a return of 100% (assuming the number of shares stays the same). It's unlikely that the company will continue delivering those same returns from its early years.
With that said, Nvidia's growth story is far from over, especially as AI contributes to its data center and automotive businesses while a possible recovery in gaming plays out over the long term. Shares are still attractive.
