This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia (NASDAQ: NVDA) stock was crushed on Jan. 27, dropping 17% in a single session after a fresh wave of doubts came to the forefront following the cost-effective artificial intelligence (AI) model unveiled by Chinese start-up DeepSeek.
DeepSeek's claim that it trained its R1 model for just $6 million and made it competitive enough to perform as well as the more expensive o1 reasoning model from OpenAI rattled investors. Shares of Nvidia have delivered stellar gains over the past couple of years, as its revenue and earnings have grown remarkably thanks to the booming demand for its expensive graphics cards that are used for training and deploying AI models.
So, DeepSeek's claim of doing more with less has raised fresh concerns about the potential demand for Nvidia's chips in the future. However, this is not the only factor that has been weighing on Nvidia stock of late. The potential restriction on Nvidia's chip exports to international destinations and the relative slowdown in spending on AI infrastructure are also issues (which have now been exacerbated by DeepSeek's breakthrough).
However, pressing the panic button and selling Nvidia on this piece of news may not be a smart move. After all, there are enough tailwinds suggesting that it may be able to regain its mojo once again and even hit the $200 mark.
AI infrastructure spending is set to be massive in 2025
Concerns about a slowdown in AI infrastructure spending seem to have been put to rest based on recent announcements made by the major stakeholders in this space. First, Microsoft announced that it is set to raise its capital expenditure (capex) by 43% in the current fiscal year to $80 billion as it looks to build more AI data centers.
Now, Meta Platforms has also announced that it will increase its 2025 capex by roughly 50% from last year's estimated outlay. The announcements by these tech giants have also been accompanied by a major development at the White House. SoftBank, OpenAI, Oracle, and Abu Dhabi-based AI investment firm MGX have announced that they will "begin deploying $100 billion immediately" for building AI infrastructure in the U.S. as a part of the Stargate Project.
Of course, you may be wondering if the low cost of training DeepSeek's model will lead Nvidia customers to reduce their spending on its chips. It's too early to jump to a conclusion, but there is a possibility that the demand for Nvidia's data center graphics cards won't be dented. That's because the efficiency displayed by DeepSeek could encourage more companies to build cost-efficient AI models, which means that compute demand is likely to remain solid.
So, there is a possibility that AI-focused spending by U.S. tech titans in 2025 could head higher once again. This would pave the way for Nvidia to sustain the outstanding revenue and earnings growth that the company has been clocking over the past couple of years.
NVDA Revenue (TTM) data by YCharts.
A big reason why Nvidia will be the most likely beneficiary of the AI splurge in 2025 is because it continues to dominate the market for data center graphics processing units (GPUs). The company controls an estimated 70% to 95% of the AI data center GPU market per various estimates, though there's a good chance that its share is at the higher end of that range.
That's because rivals such as AMD and Intel have barely managed to make a dent in the AI chip market. AMD is Nvidia's closest competitor in the AI data center GPU market, and its estimated 2024 revenue from sales of these chips is a fraction of Nvidia's potential revenue from this space. Things are even worse at Intel, as the company is expected to fall short of its $500 million AI chip revenue target for 2024.
So, Nvidia is on track to corner most of the incremental spending on AI chips this year. Even better, the doubling of advanced chip packaging capacity by Nvidia's foundry partner Taiwan Semiconductor Manufacturing should ideally allow the former to cater to the terrific demand from the tech giants. As a result, there's a good chance that Nvidia's earnings growth in fiscal 2026 (which will begin shortly and coincide with 11 months of 2025) could be higher than what analysts are expecting.
That could be the reason why this semiconductor stock could jump to $200 this year.
Decoding the path to $200
Nvidia stock needs to jump 55% from current levels to hit $200. Consensus estimates are projecting a 50% increase in Nvidia's earnings in fiscal 2026 to $4.45 per share. The Street-high estimate points toward a 101% jump in its bottom line.
However, Nvidia can beat the average earnings growth estimate for the new fiscal year on the back of incremental spending on AI infrastructure and the capacity improvements by TSMC. Assuming it achieves a 75% jump in its bottom line, Nvidia could report earnings of $5.16 per share in fiscal 2026. Applying a forward earnings multiple of 40 (in line with the company's five-year average forward earnings multiple) to the projected earnings for the fiscal year would be enough to help Nvidia stock hit $200.
What's more, the forward earnings multiple of 40 assumed above is lower than the stock's trailing earnings multiple. So, this AI stock could deliver healthy gains even if it trades at a discount going forward.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
