Should one consider purchasing Nvidia's Shares?
Nvidia's (NVDA) stock has been a significant victor in the past two years, with a surge of over 238% in 2023 and approximately 164% this year, as of the current point. These substantial back-to-back year gains have propelled the company into becoming one of the largest globally. The question at hand is whether the stock can achieve a three-peat of remarkable gains in 2025. Historically, Nvidia has managed returns of 30% or more for three consecutive years on four occasions and 50% or more for three consecutive years twice, though it has never managed four years of 30% returns consecutively.
Let's delve into why I believe Nvidia may chalk up another successful year in 2025.
Unprecedented demand for AI chips
Any investment in Nvidia is essentially an investment in the field of artificial intelligence (AI). The graphics processing units (GPUs) developed by Nvidia are integral to the construction of AI infrastructure due to their ability to perform multiple calculations simultaneously. This makes them ideal for training large language models and running AI inference.
As AI models grow more complex, they require increasingly more computing power to advance. For instance, both Amazon's Llama 4 LLM and xAI's Grok 3 model required ten times as many GPUs for training as their predecessors.
The surging demand for GPUs is primarily driven by large hyperscale companies like Microsoft, Alphabet, Amazon, and Meta Platforms, as well as well-financed AI startups such as OpenAI and Elon-Musk backed xAI. These entities are competing fiercely to create the most advanced AI models, leading to what Nvidia has referred to as "insane" demand for its newest-generation Blackwell GPUs.
Moreover, growth is expected to continue, with Nvidia's primary customers indicating their intention to invest more in building data centers to support their AI ambitions. Major clients such as Meta Platforms and Alphabet have openly acknowledged that underinvesting in AI infrastructure is their primary concern, as they capitalize on what they regard as a generational opportunity. Oracle, on the other hand, anticipates strong AI infrastructure growth to persist over the next five to ten years.
A defensive moat
Although other companies manufacture GPUs, Nvidia has managed to build a significant competitive advantage primarily through its CUDA software platform. GPUs were originally developed for enhancing graphics rendering in applications such as video games. However, Nvidia expanded the use case for these chips by developing a free software program, CUDA, that enabled developers to program its chips for various tasks.
Over time, CUDA became the standard for developers learning to program GPUs for various tasks. Consequently, Nvidia has developed a significant competitive moat. CUDA's initial success can be partly attributed to Nvidia's GPUs' use in cryptocurrency mining, which demonstrated the power of its GPUs in high-performance computing.
Since its inception, Nvidia has continued to evolve its CUDA platform by building domain-specific microservices and libraries called CUDA X to better optimize it for AI. Moreover, it has accelerated its GPU development cycle to once a year to maintain its position at the forefront of GPU technology.
Nvidia's major challenge at present appears to come from custom AI chips, such as the ones designed by Broadcom for specific purposes. However, these custom chips are more expensive and take longer to design and manufacture. In contrast, Nvidia's chips are more cost-effective and widely available, with an array of AI-specific microservices and libraries available through CUDA X.
Custom AI chips are undoubtedly set to carve out a share of the market, but Nvidia seems likely to remain dominant in the AI chip market for the foreseeable future.
Favorable valuation
Despite its remarkable gains over the past two years, Nvidia's stock still trades at an affordable forward price-to-earnings (P/E) ratio of about 30 based on 2025 analyst estimates, and a price/earnings-to-growth (PEG) ratio of approximately 0.95. A PEG ratio unders 1 is generally considered undervalued, while growth stocks often boast PEG ratios well above 1.
For a company that recorded a 94% year-over-year revenue growth last quarter and is projected to see 50% revenue growth in 2025, this is an attractive valuation. With AI expected to remain in its infancy and the company benefiting from a wide moat, Nvidia seems like a sound investment heading into 2025.
Given the unprecedented demand for AI chips, Nvidia's position as a leading provider with its CUDA software platform offering a competitive advantage, and its favorable valuation, investing in Nvidia might be a strategic move to capitalize on the potential for continued growth in the AI sector in 2025. The company's ability to deliver substantial returns in the past and its current position as a key player in the AI market, combined with its relatively affordable valuation, make it an attractive option for those interested in finance and investing in AI-related technology.
