Is Nvidia a buy? | The Pied Fool

The question on many investors’ minds is whether Nvidia (NVDA -1.95%)one of the best-performing stocks on the market, it’s still a buy after its huge advance over the past five years.

For those who missed out on buying stocks, let’s look at five reasons why I think the answer is still yes.

1. The AI ​​arms race

There is currently a race among major technology companies to build data centers designed to handle artificial intelligence (AI). That’s a handful of some of the biggest names in tech. While investors may not always be fans of their spending plans, capital expenditure (capex) budgets for these tech leaders are on the rise.

The biggest names spending on AI infrastructure include the masters of cloud computing Microsoft, Amazon, Alphabetand companies like Meta platforms, OracleOpenAI and Elon Musk adze and xAI.

Both Alphabet and Meta Platforms have said the biggest risk related to developing their AI infrastructure is underinvestment, given the immense opportunity AI offers. Musk, meanwhile, built his own data center for xAI because Oracle couldn’t produce the AI ​​cluster he needed fast enough.

And while these big tech companies reign supreme, the one company best positioned to continue reaping the rewards is Nvidia, which by selling its graphics processing units (GPUs) is essentially the arms dealer in the battle for supremacy. AI.

2. It will require exponential computing power

As these companies build out their AI infrastructure, there is no sign that this spending will stop. The main reason is that as large language models (LLMs) advance, they need more computing power to be trained.

And they won’t need a few GPUs for training anymore – they’ll need exponentially more. For example, xAI’s Grok 2 used 20,000 GPUs for training, while Grok 3 will use 100,000.

Meta Platforms said its next-generation Llama 4 model will likely need 10 times more computing power than Llama 3. That would bring the number of GPUs needed to train the model to 160,000.

On its recent earnings call, Oracle said it sees no end in sight, saying investors shouldn’t worry about a slowdown in AI training spending over the next five to 10 years. The company predicted that there will be no slowdown in the shift to spending on AI inference, which is less computationally intensive.

In this context, Nvidia seems to have a long growth track.

Image source: Getty Images.

3. A software advantage

Nvidia isn’t the only GPU maker. Advanced microdevices is its biggest rival, while Broadcom helps make custom chips for companies like Alphabet and Meta.

However, Nvidia has over 80% market share in the GPU space. In its second-quarter results, data center GPU revenue rose 154% year-over-year to $26.2 billion. AMD’s data center revenue rose 115% to $2.8 billion in the second quarter.

Nvidia’s dominance stems largely from the wide moat the company created through its CUDA software platform, which is what most GPU programmers were taught to use. Created in 2006 so developers could program their GPUs directly, the company gave away the software to sell more chips. In the intervening years, Nvidia has built a number of tools and technologies on top of CUDA, called CUDA-X, to extend its software lead even further.

With Nvidia’s software so entrenched in the GPU programming community, it would be difficult to replace the company as the GPU leader at this point, as the time and cost to retrain programmers on other platforms would be too great.

4. Innovation leader

In addition to its wide moat created by its software, Nvidia is also at the forefront of GPU technology. The company recently decided to ramp up its development cycle to introduce a new GPU architecture roughly every year, up from a previous development cycle of two years.

The company’s current-generation Hopper chips have been met with voracious demand, but management is already set to begin rolling out new chips based on its Blackwell architecture by the end of the year. Nvidia has already announced plans for its next-generation Rubin architecture in 2026.

This fast pace is meant to keep the company at the forefront of innovation while maintaining pricing power. Meanwhile, all of its architecture is backward compatible and can work with older systems, so customers don’t have to worry about large orders quickly becoming obsolete.

The company has also started selling full AI-ready servers, which only adds to the potential growth opportunity.

5. Stock is cheap

In addition to the company’s strong growth prospects and a wide moat, Nvidia stock is also cheap. It trades at a forward price-to-earnings (P/E) ratio of only about 30, based on analyst estimates next year, and a price-to-earnings-growth (PEG) ratio of just over 0.8.

PEG ratios take into account a company’s earnings growth rate, and stocks with PEG ratios below 1 are generally considered undervalued. High growth stocks will often command multiples well above 1. So for a stock with the earnings and revenue growth that Nvidia has demonstrated, a forward P/E of 30 and a PEG ratio of 0.8 is very attractive . Also note that this is based on Nvidia’s growth for next year, which is lower than its current astronomical earnings growth rate.

NVDA PE ratio (forward one year); data by YCharts.

These are very modest valuation multiples for a company that has recently grown triple-digit revenue and has a long track record of continued growth.

So to answer the question at the beginning: Yes, Nvidia is a buy.