Where will Nvidia stock be in a year?

Following the 2022 launch of OpenAI’s ChatGPT, generative artificial intelligence (AI) has taken Wall Street by storm. Few companies have benefited more from Nvidia (NVDA -2.10%) — the chipmaker that creates the hardware needed to make this new technology possible. An explosive second-quarter earnings report suggests its boom is far from over.

Nvidia’s revenue rose 122% year-over-year to $30 billion, compared with analysts’ expectations of $28.7 billion. Growth was driven by demand for advanced products graphics processing units (GPUs) such as the H200, which helps train and run AI algorithms. The company’s bottom line also remains buoyant, with net income up 168% to $16.6 billion.

How much longer can Nvidia’s rally continue? Let’s dig deeper into what the next 12 months could hold for this technology leader.

The case of the bear

Nvidia is becoming an increasingly polarizing stock. While few would deny its operational drive, we can doubt that the AI ​​industry buys its expensive hardware. So far, things don’t add up.

While facing the consumer large language models (LLM) they are fun to play, they seem far from a transformative technological megatrend. And even if these algorithms could become smart enough to make a big splash, their monetization potential remains unclear due to competition from free, open-source options such as of Meta Elon Musk’s Blade or Grok.

Analysts at Goldman Sachs (GS -0.78%) highlights these alarming dynamics. In a June report, they suggests that the roughly $1 trillion the tech giants invested in AI capital spending may never pay off. If Nvidia’s customers don’t start making money, they will eventually stop buying the company’s expensive chips, leading to lower sales and eroding margins.

With a trace price-earnings ratio (P/E) multiple of 59 compared to Nasdaq-100 average of 32, Nvidia valuation prices in significant future expectations. And if those don’t materialize, the stock could crash.

The case of the bull

In the best-case scenario, Nvidia’s long-term rally is just beginning. According to Bloomberg analysts, the generative AI industry could expand to a compound annual growth rate (CAGR) 42% to $1.3 trillion by 2032 as investment shifts from training infrastructure to consumer use cases such as software and advertising. If that’s true, Nvidia’s current sales are just a drop in the bucket compared to its long-term potential.

Also, management rejects itself the suggestion that its customers will not profit from their AI investments.

Image source: Getty Images.

Nvidia CFO Colette Kress says cloud computing providers are seeing an “immediate and strong return” on investment in AI. On the earnings call, Kress claimed that $1 spent on Nvidia hardware could generate $5 over the next four years. That number rises to $7 for the company’s newest products, such as the HDX H200 AI accelerator. However, while the strong demand suggests that Nvidia’s cloud customers see value in its hardware, Kress’ claims could be little misleading.

These companies still serve the infrastructure side of the AI ​​market. They buy Nvidia GPUs to lease to AI start-ups. If consumer-facing startups can’t monetize the technology, eventually they’ll stop renting GPUs, and cloud providers won’t buy them.

Is Nvidia stock a buy?

Nvidia is a great company because it sells the products the market wants. And its stock will likely continue to rise in the near term. However, the long-term demand fundamentals for AI GPU products are shaky.

This hype-driven industry could face a reckoning in the next 12 months if the software side of the opportunity doesn’t begin to show more progress toward monetization. Investors should consider taking profits or avoiding Nvidia stock until more information becomes available.