Nvidia(NASDAQ: NVDA) delivered stunning growth over the last year. Graphics processing units (GPUs) are the hot commodity for powering artificial intelligence (AI) in data centers, and Nvidia has long dominated the GPU market.
The shift to AI is driving an increase in data center investment, which provides a tailwind for Nvidia. The company expects revenue to triple year over year in the first quarter to $24 billion, but looking at its long-term prospects, there are two important reasons this AI stock still has room to run.
1. Growth in AI infrastructure spending
Data center products are Nvidia's largest revenue source. This segment drove 83% of its $22 billion in revenue in the most recent quarter, so the investment in data center infrastructure is vital to Nvidia's growth.
In 2023, spending on data centers by the 10 largest cloud service providers totaled $260 billion, according to Dell'Oro Group. AI-related spending is growing much faster than the overall data center market, and this is reflected in Nvidia's numbers. The company's revenue more than doubled last year to nearly $61 billion.
Data by YCharts
In 2024, Dell'Oro expects total spending on data center infrastructure to accelerate to 11%, driven by investment to support new applications powered by generative AI. Other companies are pointing to high demand for Nvidia's chips. Dell Technologies, an Nvidia customer, said its backlog for AI-optimized servers nearly doubled in its most recent quarter.
It's important to remember that Nvidia offers more than just GPUs. It also supplies software and systems, which is a lucrative opportunity.
2. Nvidia will squeeze every ounce of profit out of this opportunity
For all the hype around Nvidia's market-leading AI chips, the company doesn't get enough credit for a how smartly it positions its products for profitable growth.
For many years, Nvidia positioned its gaming GPUs to allow for increases in average selling prices as gamers upgraded to the latest graphics cards. This fueled its profits and generated good returns for shareholders. The company's approach in the data center business is similarly designed to generate high returns.
For instance, Nvidia doesn't just sell individual chips to data centers; it bundles them in a system. Nvidia's DGX system includes eight H100 GPUs, which individually are quite expensive. The additional software and services Nvidia offers on top of its hardware adds a lot of value that it can monetize with high margins.
Nvidia's net income grew 581% last year to nearly $30 billion, or almost half of its total revenue. The high profit margin Nvidia generates from sales makes the stock a solid long-term investment.
Nvidia will face competition. Intel and Advanced Micro Devices are already working on AI chips to compete with Nvidia, but Nvidia is the innovator in GPU technology, and its recent growth spurt gives it a tremendous advantage in financial resources to protect its lead in the GPU market.
Analysts currently expect Nvidia to grow earnings per share by 35% on annualized basis over the next few years. The stock won't continue to double every year, but with management estimating its data center opportunity to be worth $1 trillion, there's enough runway for shares to hit new highs over the next decade.
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John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
