5 Reasons Nvidia isn't in an AI-fueled bubble

Nvidia's shares may actually be cheap.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The stock market has a long history of creating bubbles, particularly in the technology sector. However, when it comes to Nvidia (NASDAQ: NVDA), the chip maker's eye-popping valuation may not actually be signs of a bubble. Rather, it might reflect a deeper truth about the rapidly evolving state of artificial intelligence (AI).

Nvidia's shares are currently trading at 77.1 times trailing earnings, a lofty valuation by historical standards and rich even for the high-growth tech sector. This has led some investors to question whether it's time to take profits on Nvidia stock. After all, the chipmaker's shares are up by a staggering 206% over the prior 12 months.

However, several lines of evidence suggest that Nvidia's growth story is still in the early innings and that AI is on track to fundamentally alter the world. Here is a look at five key tailwinds that should power Nvidia's shares even higher over the next several years.

Five key themes

First, the general population remains largely unaware of the true power of AI. This situation is set to change dramatically later this year as Apple integrates AI into its ecosystem and Amazon strives to make Alexa smarter with AI.

As a broad base of consumers begin to experience the benefits of AI in their daily lives, demand for AI-powered products and services will likely skyrocket, driving substantial revenue growth for companies like Nvidia that provide the architecture behind the technology.

Second, the pace of AI development is accelerating. The exponential growth of computing power has put humanity on the doorstep of a series of "Gutenberg moments", or events that completely upend the status quo.

This quickening pace of innovation implies that rivals probably won't have time to challenge Nvidia's dominant position in the AI-capable graphics processing unit (GPU) space. While competitors like Advanced Micro Devices and Intel are aiming to cut into Nvidia's dominant market share, the window of opportunity is closing.

Third, the AI arms race between leading American firms, and the U.S. and China more broadly, won't allow developers time to create alternative ecosystems.

The race to achieve artificial general intelligence (AGI) is on, and Nvidia's superchips like Blackwell will likely be the primary drivers of this transformation. As companies and nations scramble to gain a competitive edge in AI, Nvidia's technology will remain in high demand.

Fourth, the advent of AI won't follow any rules established by prior transformational technologies like the internet or cars. AI can potentially alter human society at a fundamental level, and it will happen in less than five years.

Traditional valuation metrics and historical precedents, in turn, may not wholly apply to groundbreaking companies like Nvidia.

Fifth, the potential applications of AI are virtually limitless, spanning across industries such as healthcare, finance, transportation, and more. As AI becomes more sophisticated and ubiquitous, it will create entirely new markets – many of which are unimaginable today.

Nvidia, with its cutting-edge AI technology and growing customer base, is in the catbird seat.

Key takeaways

Nvidia's current valuation may seem high by historical standards. But it's important to consider the company's unique position in the rapidly evolving AI landscape.

With the general population largely unaware of AI's already incredible capabilities, the quickening pace of development, and an ongoing arms race, Nvidia should continue to post record-breaking revenue growth in the coming years.

After all, Nvidia's potential is truly unprecedented as the gatekeeper to a $100 trillion AI-based economy. Viewed in this context, the growing bubble talk around the chip maker's shares seems unjustified. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. George Budwell has positions in Apple. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Amazon, Apple, and Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Intel and has recommended the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool Australia has recommended Advanced Micro Devices, Amazon, Apple, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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