Booming ai market: Nvidia stock (NVDA) has climbed to a record high

Nvidia's stock market rise began after the late 2022 launch of OpenAI's ChatGPT generative AI chatbot, which drove substantial earnings growth for the company. Nvidia's graphics processing units (GPUs) play a crucial role in powering these AI applications.

Nvidia stock has climbed to a record high

Nvidia stock has recently reached an all-time high, driven by its impressive track record of triple-digit earnings growth. As a frontrunner in the current artificial intelligence (AI) boom, the tech giant offers customers everything from top-tier chips to software and various services.

Despite this remarkable performance, some investors are apprehensive about Nvidia's ability to maintain its rapid growth. Concerns center around the potential for other chipmakers to capture market share with more affordable products, which could pressure Nvidia’s earnings or force the company to lower prices, impacting profit margins.

While Nvidia is on track for a 176% gain this year, these worries have occasionally influenced its stock performance. However, here are three critical factors that skeptics may be overlooking—elements that could support Nvidia's long-term growth trajectory.

Key Background

Nvidia is now the world’s second-most valuable company, boasting a market capitalization of $3.4 trillion. This marks a dramatic rise from its valuation of approximately $10 billion a decade ago and the sub-$300 billion market cap it held just two years ago. The company's stock surge was significantly boosted by the late 2022 launch of OpenAI's ChatGPT generative AI chatbot, which drove substantial earnings growth for Nvidia, as its graphics processing units (GPUs) are central to these AI applications.

For the quarter ending in July, Nvidia's sales and net income soared by 350% and an astonishing 2,400%, respectively, compared to the same period in 2022. Originally recognized for its contributions to video game graphics, Nvidia remains under the leadership of its founding CEO, Jensen Huang, who is currently the 11th richest person in the world, holding a 3% stake in the company, according to Forbes.

Despite Nvidia's impressive performance, common valuation metrics suggest that its stock is expensive relative to its fundamentals. It has the second-highest price-to-sales ratio in the S&P 500, which measures a company's market cap against its revenues over the last 12 months. Nonetheless, many investors maintain a bullish outlook, driven by what Huang describes as “emotional” and “insane” demand for Nvidia’s products.

Nvidia and the AI Boom

Before delving deeper, it’s important to trace Nvidia's journey so far. The company initially focused on selling graphics processing units (GPUs) primarily for gaming. However, recognizing the transformative potential of these chips in various fields, Nvidia expanded its reach into other sectors.

The company's true growth story took off as the AI boom gained momentum, as GPUs excel at handling multiple tasks simultaneously—making them ideal for key AI functions like model training and inference.

Nvidia quickly established itself as a market leader, capturing 80% of the chip market share. It didn’t stop there; the company developed a comprehensive suite of products and services to support AI projects from start to finish. This means that customers embarking on AI initiatives are likely to find everything they need within Nvidia's offerings.

Despite this success, concerns linger about whether Nvidia can sustain its leadership position and continue to grow its share price.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.