Nvidia Stock: Bear vs. Bull
Nvidia (NASDAQ: NVDA) has featured in numerous headlines over the last two years. Its stock plummeted 50% in 2022 amid macroeconomic headwinds. Then, a boom in artificial intelligence this year sent the company's shares soaring more than 65% since Jan. 1.
The spotlight has created bears and bulls for Nvidia's stock, with some concerned about the company's position in a strained personal computer market and others optimistic about its future in multiple high-growth markets. Before investing in this tech giant, it's wise to understand both arguments.
Here's the bear vs. bull for Nvidia's stock.
Bear: A burdened PC market
Throughout the COVID-19 pandemic, the PC market skyrocketed as home-bound consumers invested in home offices and entertainment such as gaming. However, economic challenges in 2022 led to significant declines in the market. According to Jon Peddie Research, worldwide graphics processing unit (GPU) shipments fell 42% last year.
Meanwhile, Nvidia's 88% market share in desktop GPUs meant revenue in its graphics segment fell 25% year over year to $11.9 billion in fiscal 2022.
Since Nvidia was founded in 1993, it has become a dominating presence in consumer GPUs, almost singlehandedly growing the market into what it is today. The company profited substantially from a rise in people building custom gaming PCs, which require Nvidia's GPUs for video editing and to run intensive games in better quality than possible on consoles. However, inflation spikes in 2022 led many households to cut discretionary spending, including activities like PC gaming.
Inflation has eased every month since June 2022, when it hit a high of 9.1%, slowing to 6.4% in January 2023. However, it will likely take a lot longer for the PC market to benefit from the improvement.
Bull: Expanding into more lucrative industries
Nvidia's response to PC market declines was to pivot its business to artificial intelligence (AI) and data centers, other markets that heavily utilize GPUs. In fact, the tech giant's more than 60% stock rise year to date has primarily been driven by the company's potential in AI.
According to Grand View Research, the AI market was valued at $136.55 billion in 2022 and is projected to develop at a compound annual growth rate of 37.3% through 2030. And Nvidia's GPUs are poised to play a crucial role in the market's growth, with the ability to run and develop AI software.
The AI race was kicked off last November when the start-up OpenAI stunned the tech world with the release of the program ChatGPT, an advanced chatbot capable of producing human-like prose based on prompts. Nvidia is in a promising position as the primary supplier of GPUs for ChatGPT, which amounted to 20,000 units in 2020. Meanwhile, according to research from TrendForce, the expansion of ChatGPT will soon push its GPU demand to 30,000 chips as it prepares for commercialization.
Additionally, the success of ChatGPT has led multiple companies to begin developing competing programs, which could also turn to Nvidia for GPU power.
In addition to AI, Nvidia's data center business will likely take it far in the long term. The cloud market uses data centers, largely comprised of GPUs, to run platforms such as Microsoft's Azure, Amazon Web Services, and Alphabet's Google Cloud. In 2022, Nvidia's data center segment reported revenue growth of 41% year over year to $15 billion, profiting from the booming industry.
Moreover, with AI already being implemented across several cloud platforms, enhancing the technology, the industry will likely continue expanding for years.
After a financially challenging 2022, followed by a significant stock rise in 2023, Nvidia's price-to-earnings ratio sits at 55, suggesting its current price is expensive. However, the company's shares climbed 288% in the last five years and over 7,500% in the last decade.
As the company expands in two high-growth industries and the PC market gradually recovers, Nvidia has massive potential for stock gains in the future. So, the bulls win this one, with Nvidia's stock a screaming buy right now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
