The artificial intelligence (AI) boom is booming

Nvidia (NASDAQ: NVDA) was one of the most popular artificial intelligence (AI) stocks on the market. The split-adjusted stock price is up nearly 700% since 2023. But the stock is actually down 14% after hitting a peak of about $136 a share in June, shortly after the company took its completed 10 for 1 stock split.

One reason for the pullback is uncertainty about the sustainability of AI spending. Investors will see evidence that capital spending drives revenue growth and productivity. But little supporting evidence has led to concerns about AI budget cuts.

Another reason for the pullback is the sequential decline in Nvidia’s gross margin in the last quarter, a potential sign of competitive pressure. More companies are designing custom AI chips, and investors are concerned that Nvidia could lose its market dominance.

However, Wall Street has good news for Nvidia shareholders on both fronts. Here are the important details.

JPMorgan says investment in AI infrastructure is creating momentum

Jonathan Linden and Joe Seydl at JPMorgan I believe that capital spending on artificial intelligence (AI) infrastructure continues to build momentum. They estimate spending from five hyperscale cloud companies — Microsoft, Amazon, Alphabet, Meta platformsand Oracle — will grow 24% annually over the next five years, up from 15% annually over the past five.

Additionally, Linden and Seydl expect AI to have a measurable impact on productivity by the end of the decade. It may sound like a distant future, but they explained that the gap between technological innovation and productivity gains is actually shrinking. “Think of it this way: it took 15 years for the personal computer to increase the productivity of the economy. AI could do this in seven.”

International Data Corp. estimates that artificial intelligence will add $4.9 trillion to the global economy in 2030, up from $1.2 trillion this year. In this scenario, AI would account for 3.5% of global GDP at the end of the decade. The implications of this estimate are enormous: Investments in AI are not only worthwhile, but essential for companies hoping to keep pace with their competitors.

Undoubtedly, the underdogs will write off AI as an overhyped technology in the coming years, just as some people did with the Internet in the 1990s. And AI stocks may take a massive discount at some point, just as they did- o Internet stocks in the early 2000s. But the naysayers will eventually be proven wrong, and Nvidia’s stock price could rise much higher in the future. Indeed, I/O Fund’s Beth Kindig believes that Nvidia could be a $10 trillion company by 2030.

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Morgan Stanley says Nvidia’s competitors are consistently short

Nvidia builds the most covered graphics processing units (GPUs) in the computing industry. The company accounted for 98 percent of data center GPU shipments last year, and those processors are the gold standard in accelerating AI workloads. Nvidia’s market share in AI chips exceeds 80% and Forrester Research recently wrote: “Without Nvidia GPUs, modern artificial intelligence would not be possible.”

The surge in demand for AI infrastructure has naturally drawn more competitors to the market. That includes chip makers like Intel and Advanced microdevicesas well as big tech companies like Alphabet, Amazon and Apple. All have designed alternative GPUs or custom AI accelerators. But CEO Jensen Huang is confident that Nvidia’s chips offer the “lowest total cost of ownership,” meaning chips with cheaper price points can actually cost more once the associated expenses are factored in.

Even so, Nvidia will almost certainly lose market share as custom AI accelerators become more popular in the coming years. But losing market share is not the same as losing market leadership. Nvidia’s superior hardware, along with its robust ecosystem of developer support software, gives the company a competitive edge that rivals find difficult to match.

Analysts at Morgan Stanley so he said in a recent note. “We’ve seen many threats to Nvidia since 2018 — something like a dozen start-ups, more efforts from commercial competitors like Intel and AMD, and more custom designs. Most of these fell short. Competing with Nvidia, a company that spends $10 billion a year on research and development, is a difficult feat.”

Wall Street expects Nvidia’s earnings to grow rapidly

Wall Street is very bullish on Nvidia. Of the 64 analysts following the company, 94% rate the stock a buy and the remaining 6% rate the stock a hold. No analysts recommend selling the stock at this time. And Nvidia has an average price target of $150 per share, which implies a 29% upside from the current share price of $116, according to CNN Business.

Going forward, Wall Street analysts expect Nvidia’s earnings to grow 36% annually over the next three years. This consensus estimate makes the current valuation of 54 times earnings look quite reasonable. These numbers give a PEG ratio of 1.5, a substantial reduction from the three-year average of 3.1. That’s good news for potential investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia and Oracle. The Motley Fool recommends Intel and recommends the following options: long $395 January 2026 calls on Microsoft, short $405 January 2026 calls on Microsoft, and short $24 November 2024 calls on Intel. The Motley Fool has a disclosure policy.

Nvidia stock investors get good news from Wall Street: Artificial intelligence (AI) boom is thriving was originally published by The Motley Fool