3 Things About Nvidia That Naysayers May Be Ignoring

Nvidia (NASDAQ: NVDA) stock has climbed to a record high in recent days, thanks to the company's solid track record of triple-digit earnings growth. The tech giant has emerged as the leading player in today's artificial intelligence (AI) boom, selling customers everything from the world's top-performing chips to software and other services.

In spite of this showstopping performance, though, some investors have worried about the company's ability to continue at this pace over time. The risk is other chipmakers, selling less-expensive products, could erode Nvidia's market share and therefore weigh on earnings -- or pressure Nvidia into lowering prices, which could hurt margins.

Nvidia stock is heading for a 176% gain this year, but these concerns have weighed on performance from time to time in recent months. Here are three things about Nvidia the naysayers may be ignoring -- and these elements could ensure the company's long-term growth story.

Image source: Getty Images.

Nvidia and the AI boom

Before diving in, though, let's take a look at Nvidia's path so far. The company started off selling its graphics processing units (GPUs) primarily to gaming customers, but after realizing the power of these chips to revolutionize other areas, Nvidia broadened its reach into other sectors. And the Nvidia story truly blossomed as the AI boom gathered momentum. This is because the GPU, which processes many tasks simultaneously, is the ideal tool to power key AI tasks, such as training and inferencing models.

Nvidia took the lead here in the chip market, gaining 80% share, but the company went even further by developing an entire range of products and services to power AI from start to finish and from any angle. So, customers building an AI project are likely to find all that they need at Nvidia.

As mentioned, the big concern now is whether Nvidia will be able to maintain its leadership and keep growth and the share price climbing.

Now, let's consider the three elements naysayers may be ignoring, and when combined, they could result in outsized growth for Nvidia for years to come. These are the company's gross margin level, growth rate, and focus on innovation.

Nvidia's mind-boggling gross margin

First, Nvidia's gross margin has remained above 60% for most of the past five years, and in recent quarters, it's topped 70%. The company recently said it's on track for gross margin of 75% in the third quarter and in the mid-70s for the full year, a mind-boggling level in ordinary times, but even more impressive right now. That's because Nvidia is preparing to ramp up production of its new Blackwell architecture and launch the platform -- and launches and early days of a product generally involve higher costs.

NVDA Gross Profit Margin (Quarterly) data by YCharts

This is coupled with revenue growth in the triple digits in recent quarters, and even if this dips to double-digit growth, the growth and profitability picture remain extremely bright.

Now that's positive, but one more element is necessary to solidify potential for long-term success, and that's innovation, the third factor to consider. So far, customers have been willing to pay for Nvidia's innovation and even wait for it -- Blackwell demand has surpassed supply, for example, yet that hasn't scared customers away.

Moving forward, Nvidia has pledged to update its GPUs annually, so it will be difficult for other companies to come up with a faster chip more quickly. Nvidia may be too far ahead for others to catch up. Meanwhile, the chip giant continues to invent algorithms to keep its current infrastructure -- such as the Hopper architecture -- improving over time. This means customers can add to and build upon what they already have, as well as integrate new Nvidia products into their systems.

So, Nvidia, through its older and brand-new products, may keep customers coming back, and this should keep the growth rate high. Finally, the more the company scales its processes, the more cost-efficient it should become, helping to keep margins wide.

This combination of solid margins and high growth is something that should calm the worries of naysayers -- and support the idea that Nvidia stock has much more room to run over the long term.

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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.