With shares up by 2,800% since 2019, Nvidia (NVDA -2.33%) demonstrates the life-changing potential of long-term investing. An investor who purchased just $1,000 worth of the stock back then would have $28,000 today. That said, past performance is no guarantee of future returns. Let's dig deeper to see if the iconic chipmaker still has millionaire-maker potential over the next five years and beyond.
Optimism around Nvidia is reigniting
In the weeks after Nvidia reported better-than-expected second-quarter (ended July 28) earnings on Aug. 28, there was a bit of a disconnect between the company's stock price and its performance. The market didn't seem particularly impressed, even after the chipmaker's revenue jumped 122% year over year to $30 billion and profits soared 168% to $16.6 billion.
However, management used its three-day AI Summit, which ran from Oct. 7 to Oct. 9, as an opportunity to stoke optimism about its hardware business. At the conference, CEO Jensen Huang introduced exciting new use cases for the technology, including "physical AI," which are autonomous robots interacting in the real world.
But beyond grandiose projections, investors have something tangible to get excited about --Nvidia's new Blackwell-based artificial intelligence chip infrastructure.
This next-generation AI hardware could reduce the inference (training) costs of large language models (LLMs) by up to 25 times compared to older chips. This is a significant technological improvement, and demand is so heavy that the chips are already sold out for the next 12 months.
This remains an infrastructure-driven industry
For cloud giants, the play is simple: Buy as many AI chips as possible to offer advanced computing power to clients and prevent them from getting into the hands of rivals. As Alphabet's CEO, Sundar Pichai, put it: "The risk of underinvesting is dramatically greater than the risk of overinvesting." And he isn't the only executive with this perspective.
Social media giant Meta Platforms is also going all-in on AI hardware, with its management expecting to spend $35 billion to $40 billion this year in capital expenditures, with much of that dedicated to data center infrastructure supplied by Nvidia. However, unlike Alphabet, Meta doesn't have a cloud business, where it could ostensibly justify this level of spending with potential revenue. Furthermore, its flagship LLM, Llama, is free and open-source, meaning it isn't designed to generate profit.
Meta is spending billions on experimental infrastructure that it doesn't plan to monetize. And this should raise alarm bells about the sustainability of demand for Nvidia's hardware.
Image source: Getty Images.
The situation is reminiscent of the metaverse, Meta's last big gamble where CEO Mark Zuckerberg invested $46.5 billion in the virtual reality concept, with practically nothing to show for it. Shareholders generally want to see profits, not speculation. And eventually, major Nvidia clients like Meta could face pressure to scale back their arguably reckless AI investments.
How much longer will this last?
With a relatively low valuation (the stock trades for 35 times forward earnings) and new Blackwell-based AI chips poised to supercharge top-line growth, Nvidia has everything it needs to unlock another bull run -- and possibly mint even more millionaires in the process. But how much longer can the speculative AI industry boom without the real-world results to justify all this capital investment?
Long-term investors may want to look for more evidence that the consumer-facing software side of generative AI is pulling its weight before considering a position in Nvidia's stock. The new rally is certainly tempting, but there is potential for a significant correction if cloud and data center providers decide AI tech is no longer a strategic focus.
