Over the past few years, perhaps no other stock has captured the attention of investors as much as Nvidia (NASDAQ: NVDA). Once viewed primarily as a designer of chips used to help video game graphics, the company's graphic processing units (GPUs) have become the backbone of artificial intelligence (AI) infrastructure, given their superior processing speed and energy efficiency compared to the central processing units (CPUs) found in computers and smartphones.
Meanwhile, the company was able to create a large moat long ago by developing a software platform called CUDA that allows developers to program its chips directly. CUDA became the standard on which developers learned to program GPUs, and that, in turn, has helped make Nvidia GPUs the most desirable today. While the market for GPUs has become extraordinarily large with the advent of AI with plenty of developers, Nvidia nonetheless has been able to capture an approximately 90% market share.
Despite this market dominance and its huge stock price gains in recent years, Nvidia's stock remains attractively priced, trading at a forward price-to-earnings (P/E) ratio of about 31 based on 2025 analyst estimates and a price/earnings-to-growth (PEG) ratio of approximately 1. A PEG ratio less than 1 is typically viewed as undervalued, while growth stocks will often carry PEG ratios well above 1.
NVDA PE Ratio (Forward 1y) data by YCharts
While Nvidia's past success has been well documented, the question today for many investors is whether the stock is a buy, sell, or hold going forward. Let's take a look at why I think the stock is still a potential buy.
Future GPU demand is the key
With an attractive valuation and a wide moat, I think the most important issue that will ultimately help determine whether Nvidia's stock is a buy or sell is how future GPU demand shapes up. The parallel that bearish investors tend to draw on is how demand for Cisco Systems' routers, which were the backbone of the internet infrastructure boom, dried up after the initial huge surge.
One big difference, however, is the issue of obsolescence. Part of the reason Cisco began seeing a slowdown was that router technology during that time was evolving quickly, and older routers were becoming obsolete pretty quickly despite their high costs. The networking company also did not have the wide software moat that Nvidia currently enjoys.
Nvidia's GPUs, on the other hand, have been designed to be backward-compatible. So, while its technology is continuing to advance and its GPUs become more powerful, its older GPUs remain useful and don't become obsolete.
The most important thing with GPU demand, though, is that as tech giants and AI start-ups train their large language models (LLMs), they not only need more computing power, but also exponentially more computing power when they advance. For example, xAI's Grok3 model was using 10 times as many GPUs to train on as Grok2 (it was originally 5x, but it was recently upgraded to 10x), while Alphabet has said its Llama 4 LLMs would need as much as 10 times the computing power as its earlier predecessor.
Currently, some of the world's largest technology companies have been racing to create better AI models, including Amazon, Alphabet, Meta Platforms, and Microsoft. All are investing heavily in AI infrastructure, and most have already indicated that their capital expenditure budgets related to AI will increase in 2025.
Amazon CEO Andy Jassy has called AI a "maybe once-in-a-lifetime type of opportunity," while Meta CEO Mark Zuckerberg and Alphabet's CEO Sundar Pichai have both indicated that the bigger risk with AI is underinvesting. Oracle Chairman Larry Ellison, meanwhile, has said he sees no let-up in sight for AI training over the next five to 10 years.
If I believed that the CEOs of the world's largest tech companies would suddenly become satisfied that their AI models are good enough and that they don't need the best one in the next few years, I'd be a seller of Nvidia's stock. However, given the competitive nature of this buildout, I just don't see that happening.
That means that Nvidia will continue to be a big AI winner and that its stock is still a buy.
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*Stock Advisor returns as of December 2, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
