Nvidia stock has soared more than 3,500% in five years.
Nvidia (NVDA -3.54%) has been around since the early 1990s and progressively grew earnings over the years by serving the video game industry. The company makes graphics processing units (GPUs), the chips that fuel the speed and action needed to make games come alive on the screen. But Nvidia only took center stage in recent years, when it became clear its GPUs also would be gamechangers for something else: artificial intelligence (AI).
Though Nvidia still serves the gaming industry, revenue from that area today is a fraction of overall revenue -- while revenue from AI represents the lion's share. Earnings have grown in the triple digits in the past several quarters, and revenue continues to reach new records. Nvidia's stock price has followed, soaring more than 3,500% over the past five years -- and it even roared past $1,000 a few weeks ago.
Most recently, Nvidia completed a 10-for-1 stock split, bringing the share price down from those levels to make it more accessible to a broader range of investors. This means right now Nvidia trades for about $130 a share, and this does make it easier for those with smaller budgets -- or those who want to open a small position -- to invest in the stock. That's positive. Now, though, the question is whether Nvidia can once again take off and deliver great returns to investors in the coming years. Is it too late to buy this high-flying stock now? Let's find out.
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Nvidia's top-performing products
Nvidia has climbed for one big reason: the top performance of its products. The tech giant sells the fastest chip around, which means customers can train large language models and complete other AI tasks quickly -- more quickly than if they relied on a rival chip. This is positive because it speeds up the time to commercialization for their products and services, allowing them to generate revenue sooner rather than later from their AI platforms.
And, as Nvidia chief executive officer Jensen Huang emphasizes, this time saved also equals lower expenses. It's costly to run a data center, so any element that can speed up operations can reduce various expenses -- from energy to workforce. This means it may be worth it for a company to pay more for an Nvidia GPU rather than go for a bargain chip from another player -- over time, this investment may actually lead to cost savings for the customer.
Importantly, customers are recognizing this. Demand is high for Nvidia chips as well as the company's full range of other AI products and services, and this has driven the earnings growth I mentioned earlier. In the most recent quarter, Nvidia reported record revenue of $26 billion, net income of $14.8 billion, and gross margin that's expanded to more than 78% from about 64% in the year-earlier period.
Seeing the strength of Nvidia's products and how they're driving earnings growth, investors have been eager to get in on this success story. This is great, but it's important to look ahead for clues about whether this success story can continue.
Blackwell followed by "other Blackwells"
And here, the situation looks promising, thanks to Nvidia's commitment to innovation. Nvidia pledges to update its GPUs on an annual basis, gaining in speed and capabilities. It plans to launch the Blackwell architecture later this year along with its best chip ever -- and it aims to follow with "other Blackwells" thereafter. Nvidia says customers are in the early days of this AI build out, and forecasts for AI market growth corroborate the idea that we're just at the start of AI growth. Today, the AI market is about $200 billion, and it's expected to increase to more than $1 trillion by the end of the decade.
So, Nvidia's commitment to innovation, current leadership, and the general forecasts for market growth all suggest the company's earnings growth will continue for quite some time.
Nvidia's valuation has increased over the past several weeks, and now the stock trades at 50x times forward earnings estimates, up from around 35 earlier this year. So the stock has become more expensive -- but considering the strengths I mention above, for the long-term investor, Nvidia is worth the price.
Of course, following the recent stock split, the shares might not immediately soar. Investors may wait for catalysts like the next earnings report or the launch of Blackwell to get in on the stock. But, over the long run, Nvidia has what it takes to roar higher again -- and that means it isn't too late to buy this top AI stock.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
