Nvidia (NVDA -2.09%) is an example of the life-changing potential of stock market investing. If you'd bought $10,000 worth of the stock 10 years ago, you would have an eyewatering $2,947,300 today -- a return of over 29,000%. The company created so much wealth that many of its employees (often compensated with stock options) are multi-millionaires.
But new investors looking at these tremendous returns will understandably be a little nervous about arriving at the party too late. After all, no one wants to be left holding the bag. Let's explore the pros and cons of Nvidia's stock to decide whether this legendary chipmaker can still set you up for life.
Growth is still tremendous, but slowing
Nvidia's third-quarter earnings were another slam-dunk. Revenue jumped 94% year over year to $35.1 billion, driven by strength in its data center segment, where it sells advanced graphics processing units (GPUs) for running and training artificial intelligence (AI) algorithms. The company commands an incredible gross margin of almost 75% (which suggests its economic moat is strong).
That being said, there are signs that growth is beginning to decelerate. Last year (fiscal 2024), Nvidia's third-quarter revenue grew by 206% over the prior year. Investors should expect the slowdown to continue as the company faces increasingly challenging year-over-year comparisons.
While there are no cracks yet, it's also unclear how much longer Nvidia will be able to sustain its sky-high margins.
The company maintains a strong economic moat through software solutions like CUDA, which makes it easier (and possibly cheaper) to develop programs on Nvidia chips compared to alternatives. However, as the market becomes increasingly flooded with AI-capable hardware, customers may stick with their existing GPUs, instead of spending huge sums to upgrade to the latest models every year.
This is still a hugely speculative industry
Wall Street remains wildly optimistic about the generative AI industry, with analysts at Bloomberg expecting it to expand at a compound annual growth rate (CAGR) of 42% to $1.3 trillion by 2032. Against this backdrop, Nvidia's chip business would have a lot more room to run. However, this projection makes some big assumptions that aren't guaranteed.
The analysts believe that the AI industry will evolve from its current orientation toward training and inference hardware, instead moving toward consumer-software applications. But this transition isn't happening very smoothly.
Image source: Getty Images.
Currently, most of Nvidia's major customers are so-called "hyperscalers" that essentially rent out its GPUs' computing power to start-ups and other AI clients. While this middleman role can be quite profitable, the consumer-facing software often isn't. ChatGPT maker OpenAI is expected to lose $5 billion this year, compared to having just $5 billion in revenue. Competition from a slew of open-source alternatives like Elon Musk's Grok could also make sustainable monetization an uphill battle.
For Nvidia, this problem remains abstract. Major customers like Meta Platforms remain committed to buying GPUs. The social media giant spent $38 billion on capital expenditures in 2024 and expects this to grow "significantly" in 2025. However, it's unclear how much longer shareholders will tolerate speculative data center buildouts before pushing back.
Is Nvidia stock still a winner?
While Nvidia's situation is complicated, the good news is that its valuation seems to fully price in the concerns about growth and the AI industry's sustainability. With a forward price-to-earnings (P/E) multiple of 34, shares are cheap compared to the company's huge growth rate.
Nvidia stock will probably continue to outperform the S&P 500 for the foreseeable future. But investors probably shouldn't expect it to repeat the life-changing growth seen over the previous decade.
