Where will Nvidia stock be in 3 years?

His rise Nvidia (NVDA 0.98%) it was nothing short of incredible. No company has grown as fast as Nvidia at the scale it is. But that’s all in the past; investors want to know what the future holds for Nvidia stock.

The problem is that Nvidia’s future is extremely cloudy. While it could continue its rapid growth, it could face challenges with its primary products.

Nvidia’s GPU growth has been phenomenal

Nvidia’s main products are graphics processing units (GPUs). These pieces of hardware were originally intended to quickly process graphics for games, but their use case has expanded beyond that. GPUs can run engineering simulations, drug research, mine cryptocurrencies, and most importantly, train artificial intelligence (AI) models. The latter has contributed substantially to Nvidia’s growth over the past year and a half.

GPUs are a top choice for running huge workloads because they can split a calculation into multiple parts and compute in parallel. Moreover, GPUs can be combined in a server to multiply this effect. In fact, the main limitation to building one of these powerful servers to run AI models is the size of a company’s checkbook.

The explosive growth powered by artificial intelligence can be seen in Nvidia’s data center revenue, which rose 427% year-over-year to $22.6 billion in its fiscal first quarter (ended April 28). Perhaps more impressive is the fact that it grew 23% quarter-on-quarter, showing that demand is still growing rapidly. All things being equal, if a company increases its quarterly revenue by 25%, quarterly revenue would have doubled by the end of the year. Nvidia is right at that point, and quarterly earnings are one of the best signs to look at and see if the demand for its GPUs is still there.

In addition, the biggest tech companies have indicated to investors that they plan to further increase their spending to increase computing power for AI demand. This bodes well for Nvidia, as it needs its customers to keep spending to stay afloat.

But there may be more to the story.

Nvidia’s profit margin is at a record high

There’s an old saying: “Your margins are my opportunity.” And this could become a problem for Nvidia.

NVDA gross profit margin (quarterly) data by YCharts

Nvidia’s gross and profit margins have expanded to record levels, which is fantastic for investors. But they can be unsustainably large. Some of its biggest customers have already developed their own in-house chips to replace GPUs for their AI computing infrastructure. This is likely in response to the high prices they have to pay for GPUs.

Take Alphabettensor processing unit (TPU), for example. When an AI workload is configured correctly, the TPU can achieve much higher performance than a GPU. With every major cloud computing company having its own product, it could become a problem for Nvidia.

However, GPUs are fantastic at running AI models and will continue to be heavily used, but investors should be careful as Nvidia’s margins may soon come under pressure.

If Nvidia’s profit margin returns to its previous peak of about 40%, it will take about 42% more revenue just to generate the same profits it can generate now at its 57% profit margin. This is concerning because Nvidia already has a premium price.

NVDA Data ON Report by YCharts

So what might Nvidia stock look like in three years? I’d say the company will continue to be a stalwart, producing an incredible number of GPUs to meet AI demand. However, I wouldn’t be surprised to see the stock around the same levels due to margin compression.

This is an underrated aspect when investing in Nvidia. I think investors need to consider the possibility that even if its revenue continues to grow rapidly, the profit margin needs to remain high for the stock to make sense.