AI has the potential to generate trillions of dollars over the next decade. Some companies are already taking advantage of this windfall early.
It is difficult to overstate the impact that artificial intelligence (AI) will have on the world in the coming years. AI has been around in some form for decades, but the latest developments have the potential to move the needle in ways we can't yet imagine.
Generative AI has demonstrated the ability to create original text, images, and audio, but the possibilities go far beyond that. When properly trained, these systems can summarize and draft emails, create presentations, search and edit data, and even draft and debug complex computer code.
goldman sachs Studies have crunched the numbers, and the estimates are surprising. As AI permeates business systems and society at large, its value could reach $7 trillion over the next 10 years.
While there will be many beneficiaries, some of the companies that are well-positioned to benefit from this AI are: Nvidia (NVDA 6.18%).
Image source: Getty Images.
Visionary Pivot
To understand how the company got to where it is today, it's important to take a step back. Nvidia originally made its fortune pioneering graphics processing units (GPUs), which create realistic images in video games, revolutionizing the industry.
The underlying technology that made this possible is parallel processing. Parallel processing allows large amounts of mathematical calculations to be processed simultaneously by breaking large jobs into smaller, more manageable bits. Nvidia began to realize its potential and quickly adapted the process to other applications.
The humble GPU has evolved far beyond video games. We now accelerate data via ether, process information in data centers and cloud computing, and enable the latest advances in AI.
Nvidia's market opportunity is expanding exponentially, increasing with every new use case. Early last year, management estimated the company's total addressable market at about $1 trillion, but that was before generative AI adoption really took off. This suggests that the number is currently increasing further.
The need for data centers that can harness the power of AI is driving a construction boom, but we're only just getting started. Bernstein analyst Toni Sacconaghi suggested the AI server market will grow 75% annually over the next three years, calling this expansion “unprecedented.”
This strong demand is evident from Nvidia's performance. In fiscal 2024, sales increased 126% year over year to $61 billion, and diluted earnings per share (EPS) increased 586% to $11.93. Nvidia's data center division, which includes chips used for cloud computing and AI, was the star of the show, generating his record $18.4 billion in revenue, up 409%.
Nvidia expects revenue for the first quarter of 2025, which ends April 30, to be a record $24 billion, up 234% from a year ago. Management was clear that the rapid expansion of generative AI was driving growth.
Just last month, Nvidia announced its latest AI flagship product, the Grace Blackwell GB200. This is what the company calls “the world's most powerful chip” for his AI. It offers five times the performance of the H100 and solidifies Nvidia's technological lead in this field.
Given that Nvidia's technology forms the foundation of AI processing, the company is driving the AI revolution.
Compete from your strengths
One of the biggest risks cited by bears is future competition, but Nvidia's relentless pace of innovation has kept rivals at bay. With an estimated 95% share of the data center market, NVIDIA has a strong foothold, said Angelo Gino, an analyst at CFRA Research.
Furthermore, demand for data centers is also expected. double by 2030, according to a report by commercial real estate advisory firm Newmark Group. Estimates are that he will need more than 10,000 of his Nvidia chips to train Chat-GPT in 2022, and that new versions will require even more of his Nvidia chips. This shows why Nvidia's gold standard AI processing chips will continue to be in high demand.
Nvidia is also the undisputed leader in machine learning, an early and established field of AI. NVIDIA controls about 95% of the market, according to data compiled by New Street Research.
Data centers are inextricably intertwined with AI technology, and Nvidia holds a commanding lead in both areas. There's always the possibility that a rival will develop a more powerful or cost-effective AI solution, but Nvidia's years of experience suggest it's hard to rule it out.
You get what you pay for
Another issue raised by Nvidia bears is the company's valuation. The company's stock is selling at a P/E ratio of 68 times and sales of 33 times (as of this writing), which may deter some investors. However, you should consider the company's track record of growth over the years and future expectations. Nvidia stock is currently selling for 32x forward price/earnings, which is only a small premium to 27x. S&P500 (^GSPC 1.02%).
Despite the recent pullback, Nvidia is still up nearly 200% over the past year, which is not an anomaly. The stock price has increased 1,600% in the past five years and 16,910% in the past 10 years.
Investors shouldn't expect such returns over the next 10 years, but one thing is certain. That means NVIDIA is well-positioned to continue to benefit from AI, and this is a once-in-a-generation investment opportunity.
