Semiconductor company and artificial intelligence (AI) darling Nvidia (NVDA -3.00%) might just be the most well-known company on the planet right now.
Considering the enormous role Nvidia plays in the AI movement, it seems like the entire technology sector hinges on how Nvidia's business is performing.
So far in 2024, Nvidia has grown its market cap by 127% -- currently hovering around $2.8 trillion. Nevertheless, one Wall Street analyst in particular is sounding the alarm and calling for even more growth.
Hans Mosesmann of Rosenblatt Securities recently increased his price target for Nvidia to $200 per share. Should Nvidia reach this price, it would imply a market cap of $5 trillion.
Let's dig into how AI is transforming Nvidia and why I see the stock as a no-brainer opportunity for long-term investors.
AI is transforming the technology industry
AI is a pretty broad term. Moreover, while AI is of high interest at the moment, the technology has existed in some form or fashion for decades.
When OpenAI released its large language model (LLM), ChatGPT, to the world in late 2022, it was perhaps the first time in modern history that AI-powered applications entered the mainstream. As such, businesses and people in general were captivated by the potential of generative AI and quickly found ways to implement the technology into their daily lives.
Although AI can take many forms, one of the biggest pillars in propping up its development is semiconductor chips. This is where Nvidia comes into play.
Image source: Getty Images.
How Nvidia is disrupting AI
When Nvidia was founded nearly 30 years ago, its primary mission was to augment graphics for video games. While gaming is still a part of Nvidia's business, the company has branched out into other areas over the last several years.
Namely, Nvidia's graphics processing units (GPU) are sophisticated semiconductor chips that are used for a wide variety of AI-driven applications such as machine learning, quantum computing, and even autonomous driving.
Today, the majority of Nvidia's revenue and profits stems from its chip and data center business.
Although hardware is currently Nvidia's bread and butter, the company has also quietly built a budding enterprise software business. Nvidia's compute unified device architecture (CUDA) software is meant to be used alongside the chips when developing AI products.
Nvidia faces fierce competition in the chip realm from the likes of AMD, Intel, and even some big tech stalwarts including Amazon and Meta.
As competition rises, Nvidia will likely eventually begin to witness a slowdown from its chip operation and it'll be increasingly difficult for the company to command such immense pricing power for several more years.
Nevertheless, if Nvidia's revenue and gross margin profile start to decelerate, the high-margin aspect of its CUDA software business should help mitigate any potential deteriorating growth in the hardware operation.
Lastly, Nvidia has also made a number of splashy investments related to AI. In particular, the company is an investor in enterprise software start-up Databricks and humanoid robotics company Figure AI.
I see both of these moves as savvy choices by Nvidia, as each provides the company with ample opportunities to further penetrate its chip and software businesses.
Is Nvidia headed to $5 trillion?
Whether Nvidia will reach a $5 trillion valuation is somewhat moot. In fact, I'd go as far as to say it's an exercise in false precision.
The ideas explored above shed light on where Nvidia's business is today, and where it could be headed as AI continues to be further integrated across industry sectors and product types.
Fortunately, I think Nvidia has an incredibly bright future backed by its robust end-to-end AI platform featuring hardware, data centers, and software.
The chart below illustrates Nvidia's price-to-earnings (P/E) multiple and price-to-free cash flow (P/FCF) over the last three years.
NVDA PE Ratio data by YCharts
The interesting thing to point out here is that both Nvidia's P/E and P/FCF ratios are well off their highs and essentially flat compared to three years ago.
Considering the company has changed dramatically over just the last couple of years, and the transformation prospects that AI presents, there's an argument to be made that Nvidia stock is cheaper today than it was three years ago and that its full potential in AI is not already priced into the stock.
I see Nvidia as a generational opportunity and one that is well positioned to continue succeeding across many areas of the AI landscape for the long term. I think investors have a lucrative opportunity to scoop up shares of one the tech sector's most prolific AI businesses in Nvidia right now.
