Day: October 14, 2024

Chip and data center specialist Nvidia (NASDAQ: NVDA) has emerged as the king of the artificial intelligence (AI) realm. Quarter after quarter, the company continues to defy expectations, set revenue and profit records, and provide investors with a laundry list of such good news that it’s hard to keep track of it all.

If you’ve held Nvidia stock at any point during the last two years, congratulations. You’ve probably made a lot of money.

But as I often express in my pieces, investors need to think long term. Can Nvidia’s rocket ship keep climbing higher?

Below, I’ll outline catalysts and risk factors facing Nvidia. Moreover, I’ll detail how I think these points can impact the stock and assess how Nvidia shares may hold up over the next five years.

The next couple of years look great, but…

One of Nvidia’s best-selling products at the moment is its H100 graphics processing unit (GPU). Meta Platforms CEO Mark Zuckerberg and Tesla CEO Elon Musk have both specifically referenced the importance of the H100 technology for their respective businesses’ generative AI development.

Yet, despite the unrelenting demand for the H100, Nvidia is already on the brink of a successor chipset. The company’s new Blackwell GPUs are set to launch later this year, and both Wall Street and Nvidia’s own management are forecasting billions of additional dollars in sales by the end of the year.

Furthermore, continued heavy spending on capital expenditures (capex) from the likes of Meta, Tesla, Microsoft, Amazon, and Alphabet should serve as a nice tailwind for Nvidia’s compute and networking business.

With all that in mind, Nvidia stock could be poised to see further gains over the next couple of years once Blackwell really hits its stride.

The longer-term picture is cloudy

One important detail to call out regarding more capex spending from big tech is that not all of this will be allocated toward Nvidia’s products. Rather, each of the “Magnificent Seven” members highlighted above is working on their own in-house custom chip designs. In other words, Nvidia’s own customers are looking to compete with the company and move away from a sweeping overreliance on its IT infrastructure.

Such a dynamic will likely be a headwind for Nvidia in terms of its pricing power. I suspect lower prices for Nvidia’s GPUs will begin eating away at its revenue growth and gross profit margins. As revenue growth begins to normalize and margins start to shrink, Nvidia’s profitability profile will tighten.

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As a result, rising competition could be the catalyst that ultimately leads to a plateau across Nvidia’s entire business. For these reasons, I think the stock has a good chance of selling off in the long run.

The bottom line

I’d like to make one thing abundantly clear: Nvidia stock likely has a solid runway ahead. However, as I’ve expressed before, I think timing will become a more important factor when assessing whether or not to buy or sell Nvidia shares.

In other words, I do not think Nvidia stock will gain another 2,800% over the next five years. While the stock will go up at times, it’s highly unlikely that shares will soar upwards in a straight line and experience minimal sell-offs.

Candidly, I think these dynamics have been at the center of Nvidia’s selling activity from several high-profile billionaires lately.

Will Blackwell and whatever else Nvidia releases over the next five years be successful products? Probably. But will they be so successful that Nvidia will remain the king of the AI realm, with the rest of the tech world lucky just to get their hands on the company’s products? In my opinion, I don’t think that will be the case.

For these reasons, I think Nvidia’s valuation will normalize over the next five years, and the stock may very well underperform its peers and the technology sector at large. I think there are more compelling opportunities in the chip industry and AI space more broadly. I would think long and hard before doubling down on a position in Nvidia over the next several years.

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*Stock Advisor returns as of October 7, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Where Will Artificial Intelligence (AI) Leader Nvidia Be in 5 Years? was originally published by The Motley Fool

The artificial intelligence (AI) market has created some monster growth stocks already, but companies involved in enabling this technological revolution are still seeing growing opportunities. Here are two AI leaders that could be profitable investments over the next year and beyond.

1. C3.ai

C3.ai‘s (NYSE: AI) recent growth has been overshadowed by the stellar performance at Palantir Technologies, but investors shouldn’t overlook C3. It recently reported accelerating revenue increases for the sixth consecutive quarter, which could set the stage for excellent returns over the next year.

C3.ai continues to expand its sales in North America and Europe. In the latest fiscal quarter, it closed 71 agreements. New deals were forged with several clients, including GSK (formerly GlaxoSmithKline), Dolce & Gabbana, and the U.S. Department of Defense.

It’s also expanding its footprint across state and local governments, with 25 agreements across several states, including Texas, California, and Florida.

All these deals are clear signs that C3.ai’s momentum is real. Customers are seeing cost savings using generative AI, and its customer service could solidify long-term relationships with these clients.

Despite the momentum, the stock has drifted down for most of the year. One factor hurting it is C3.ai’s weak profitability. Management’s guidance calls for a full-year adjusted loss from operations between $95 million and $125 million, which is a lot compared to its revenue guidance of $370 million to $395 million.

Still, the stock appears poised to rebound. The company’s net loss is improving year over year, and it’s reasonable to expect a profit down the road as the business continues to grow. If investors give the company credit for strong revenue growth, as they did for Palantir over a year ago, C3.ai’s share price could rocket higher over the next year.

2. Nvidia

Nvidia (NASDAQ: NVDA) has been one of the best ways to invest in the AI boom in recent years. It is a pure-play on the growing demand for AI-optimized computing hardware. With data centers still in the early stages of upgrading components for AI workloads, Nvidia is still a solid buy.

Thomas Siebel, the CEO of C3.ai, made a comment on his company’s last earnings call that speaks to the opportunity for Nvidia. Siebel said that it is very difficult to model the demand trends happening in the AI market right now. He said his company is seeing interest in enterprise AI from organizations it didn’t anticipate, including law firms and medical diagnostic companies.

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Nvidia is seeing similar trends. While cloud service providers generated nearly half of its $26 billion in data center revenue last quarter, it is also experiencing strong demand from AI start-ups building generative AI applications for consumers, healthcare, education, and advertising.

AI developers want to use Nvidia because it is the largest supplier of graphics processing units (GPUs), and its chips are used to power every cloud service. There are 4.7 million developers using Nvidia’s CUDA computing platform, which provides access to software development kits and other tools designed to work with its GPUs.

The stock is trading at an attractive forward price-to-earnings ratio of 34 based next year’s consensus earnings estimate. That is a steal for a company expected to grow earnings by 36% on an annualized basis.

One factor holding down the valuation of the stock is that semiconductor companies can experience pauses in demand, which happened to Nvidia in 2018 and 2022. But investors who buy its stock with the intention of holding for the long term should see market-beating returns.

The demand for AI technology in data centers will continue to grow over the next decade. This should benefit Nvidia, since it controls over 70% of the AI chip market, and it has expanding revenue opportunities in data-center networking hardware and software.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,266!*

• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,047!*

• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $389,794!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 7, 2024

John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends C3.ai and GSK. The Motley Fool has a disclosure policy.

2 Best Artificial Intelligence Stocks to Buy in October was originally published by The Motley Fool