Up 2,700% in 5 Years, Is Nvidia Stock Still a Buy?

On Oct. 7, Nvidia (NASDAQ: NVDA) launched its much-anticipated artificial intelligence (AI) Summit in Washington, D.C. The three-day event was intended to showcase the real-world applications of the technology that has help send its stock up by 2,700% in just five years.

But talk is cheap. And the market is probably waiting for more concrete data before unlocking Nvidia's next bull run. Let's dig deeper.

The AI summit

Following the launch of OpenAI's ChatGPT in late 2022, there has been no shortage of grandiose projections for the future of generative AI -- a market some analysts at Bloomberg believe could be worth $1.3 trillion in just a decade (up from $40 billion in 2023). Against this backdrop, Nvidia will have difficulty impressing the markets with its own projections. But that isn't stopping the chipmaker from trying to reignite optimism.

Image source: Getty Images.

With the AI market still overwhelmingly geared toward hardware and infrastructure, Nvidia is keen on convincing people that the software it powers can create real-world value.

At its investor day, management expanded on several interesting projects, including its NIMs (Nvidia interface microservices) blueprints, designed as a simple way for developers and companies to deploy generative AI in specific use cases like customer service agents or drug discovery. However, the most exciting development could be what Nvidia calls "physical AI," which will involve semiautonomous robots interacting in the real world.

According to CEO Jensen Huang, electronics supplier Foxconn, whose parent company is Hon Hai Precision, is already partnering with Nvidia to build and train AI-capable robots. That said, investors may want to wait for more details before getting excited. Because even if a company makes an intelligent robot, there is no guarantee it will generate profits or value for shareholders.

The market needs results, not promises

With shares up by around 5% since Oct. 7, Nvidia's AI summit reignited some optimism about the future of its chip business. But short-term fluctuations mean little in the grand scheme of things. Zooming out, Nvidia's stock still trades below its all-time high of $136 per share reached on June 18, despite solid operational performance.

Second-quarter revenue jumped 122% year over year to $30 billion, driven by growing demand for data center graphics processing units (GPUs) like the h100 and h200. However, with a forward price-to-earnings (P/E) multiple of just 35, Nvidia's valuation is relatively cheap relative to growth, implying the market doubts its ability to maintain current momentum. For context, the Nasdaq-100 has an average forward estimate of 30.

But while the average Nasdaq giant built up its business over decades of serving established, profitable sectors of the economy. Nvidia's AI business exploded in just a few years. And promises of a future dominated by AI-robot fleets can't shake the fear that this hype-fueled industry might disappear as quickly as it came. According to research from Rand Corporation, around 80% of AI projects fail, which is twice the failure rate from non-AI-technology-related start-ups.

Big tech is still betting on AI

While the future of AI tech remains uncertain, Nvidia's business looks likely to maintain its elevated growth rate for the foreseeable future. Large tech companies don't want to be seen as falling behind in a new technology platform, so they are willing to spend billions on Nvidia's hardware, even if they might not get a direct return on investment.

Meta Platforms is a great example of this type of demand. On the surface, the social media giant doesn't seem to have a good way to monetize generative AI because its flagship large language model (LLM), Llama, is free and open source for developers. Nevertheless, CEO Mark Zuckerberg expects infrastructure spending to increase in 2025 as the company works to train new versions of Llama to keep up with rival platforms like ChatGPT or Alphabet's Gemini.

It is unclear how much longer the AI arms race will last without profitability gains to justify it, so investors might want to hold off on Nvidia stock until more information becomes available.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $826,130!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 7, 2024

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. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.