Prediction: Nvidia Stock Will Beat the Market. Here's Why.

The scramble to build compute capacity for artificial intelligence (AI) models and training has enriched longtime Nvidia (NASDAQ: NVDA) shareholders. Large tech companies have been sharply increasing capital spending to build data centers and fill them with powerful servers, largely using Nvidia's products.

Retail investors and hedge fund managers alike piled into Nvidia shares over the past few years. The stock rocketed more than 400% over the last three years, even with it hovering about 25% off its record-high level.

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I believe the AI leader will continue to beat the market going forward. Here are some reasons why.

AI use will expand

Early use cases for AI have ranged from chatbots for internet searches and customer service to AI agents providing specialized services. Increasingly, businesses will be using the powerful technology to improve efficiency, target lucrative markets, and grow sales.

Manufacturers can reduce defective products, increase productivity, and save maintenance costs using AI. Nvidia and Alphabet's Google Cloud just announced a collaboration to bring agentic AI to enterprises that are aiming to have AI make decisions and perform tasks autonomously. It will use Nvidia's latest Blackwell platform on Google Distributed Cloud to effectively create on-site data centers.

Educators are also increasingly relying on AI to aid in teaching as well as research. Nvidia was targeting that segment with the release of its first desktop AI supercomputer last year. The company announced development of a compact desktop computer geared toward developers, researchers, and students. Nvidia has also launched desktop AI machines "to help marketers and other professionals leverage AI in their daily tasks," the company says.

The next era of AI

Robots powered by AI along with driver assistance and self-driving software could well drive another major growth spurt for Nvidia. The company is already realizing sharply growing sales in its automotive and robotics segment.

Automotive and robotics fiscal quarterly revenue. Data source: Nvidia. Chart by author.

Fourth-quarter revenue more than doubled year over year, and the segment contributed $1.7 billion to Nvidia's sales last fiscal year. Nvidia has business partnerships with multiple global automakers. Toyota plans to build its next-generation vehicles using Nvidia's software-defined platform for autonomous vehicles, for example.

Vehicle makers are including advanced driving assistance capabilities, and Nvidia will be one big beneficiary. Similarly, companies will utilize intelligent machines and robots increasingly across industries, including manufacturing, healthcare and logistics.

A key to beating the market

There's another important factor that can help Nvidia beat the market from here: The stock's valuation has become very compelling, as shares have dropped 17.4% this year, as of this writing.

The once high-flying stock now sports a price-to-earnings (P/E) ratio below 25 based on the current fiscal year's earnings estimates. Nvidia's business is also somewhat insulated from potential cost increases that could come from Trump administration tariff policies and the U.S. trade war with China.

Nvidia's gross profit margin increased 230 basis points last year to 75%. While investors may avoid the stock in the short term if profit margins deteriorate, the company is starting from a very strong position in that area.

No investor can know what will come in the currently turbulent geopolitical environment. A general flight to safety could push stocks down further from recent levels if investors shun stocks in general. In the end, though, a growing business with strong profitability like Nvidia's will ultimately be an attractive place to invest for the long term.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Howard Smith has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.