Will Nvidia Dominate the Next Phase of AI?

The artificial intelligence (AI) frenzy has benefited almost all industries, but it has had the most positive impact on the technology sector. Nvidia (NVDA), the chip giant, has been the star of the show. The stock has surged 167.6% year-to-date, far outpacing the S&P 500 Index's ($SPX) gain of 23.6%. Nvidia, once best known for its graphics processing units (GPUs) used in gaming, has grown into one of the most dominant players in AI and high-performance computing. 

Throughout 2024, the company has demonstrated outstanding financial performance, thanks to its leadership in accelerated computing and AI. We are now about to enter another year and possibly the next phase of AI. CEO Jensen Huang believes, "The age of AI is in full steam, propelling a global shift to NVIDIA computing." 

Let's find out if now is the time to buy this exceptional stock.

Nvidia’s Data Center Segment is a Key Growth Driver

Nvidia reported $35.1 billion in revenue in the third quarter of fiscal 2025, a 17% sequential increase and a 94% year-over-year jump, surpassing the consensus estimate by $1.95 billion. 

A major driver of Nvidia’s success is its data center segment, which reported a revenue increase of 112% to $30.8 billion. The company’s Hopper architecture, especially the H200 chip, led the charge, with remarkable demand and the fastest product ramp in the company’s history. Cloud service providers like Amazon’s (AMZN) AWS, Microsoft (MSFT) Azure, CoreWeave, Google's (GOOGL) Cloud, and Oracle (ORCL) Cloud are increasingly deploying H200-based cloud instances, fueling the growth in AI training.

Nvidia's Blackwell GPU architecture is set to accelerate AI advancements. With its customizable configurations and diverse chip offerings, Blackwell is already in high demand, with major partners such as Oracle, which will deploy over 131,000 Blackwell GPUs in its Zettascale AI cloud. This is expected to result in cost savings and improved AI performance.

According to CFO Colette M. Kress, the next phase of AI will be enterprise AI and industrial AI, with the company's "Enterprise AI in full throttle." Many companies, including Accenture and Deloitte, are using NVIDIA's AI platforms, such as AI Enterprise with NeMo and NIM, to develop Copilots and agents. The company expects NVIDIA AI Enterprise revenue to double in fiscal 2025 compared to the previous year. 

Furthermore, many industrial giants, such as Foxconn, are using NVIDIA Omniverse to improve operational efficiency. The company's AI footprint is expanding globally, with significant growth in India and Japan.

In Gaming, NVIDIA’s revenue reached $3.3 billion, marking the 25th anniversary of the GeForce 256 GPU, the world’s first GPU. Professional Visualization revenue increased 17% year-over-year to $486 million. Automotive and Robotics revenue amounted to $449 million, up 72% from a year ago.

Nvidia's profitability remains strong, with an operating margin of around 66% in Q3. Adjusted earnings rose 103% year on year to $0.81 per share. The company also generated $16.7 billion in free cash flow, demonstrating its strong cash generation capabilities while heavily investing in growth. It ended the quarter with cash, cash equivalents, and marketable securities totaling $38.5 billion. 

Nvidia's ability to increase manufacturing capacity while maintaining industry-leading margins depicts its operational efficiency. 

Nvidia Has a Moat

In this digital era, with most tech companies dabbling in AI, having a competitive advantage is critical to success. Nvidia's competitive advantage is based on cutting-edge technological innovation, specifically its leadership in AI acceleration. The company's early emphasis on AI and machine learning has helped it stay ahead of competitors and lay the groundwork for long-term market dominance.

Huang highlighted in the Q3 earnings call that the world's data centers need to be modernized to accommodate the rise of machine learning and generative AI. This transition is critical for building a new era of computing, which is predicted to involve a $1 trillion overhaul of global data centers over the next several years.

The company's roadmap remains on track. The demand for Blackwell chips is surging. Despite the fact that production is still in its early stages, deliveries are expected to exceed previous estimates. This demonstrates the enormous demand created by the generative AI revolution, as major companies such as Dell, Oracle, and Google have already integrated Blackwell into their systems. 

Nvidia expects $37.5 billion in revenue in the fourth quarter (plus or minus 2%), driven by strong demand for Hopper and the initial ramp-up of Blackwell products. While gaming revenue may decline slightly due to supply constraints, long-term growth remains strong. 

For the full fiscal year 2025, analysts project revenue and earnings to increase by 111.9% and 127.9%, respectively. In fiscal 2026, revenue and earnings are expected to increase by 51.3% and 50%, respectively. 

Is NVDA Stock a Buy, Hold, or Sell?

Nvidia led the tech sector performance over the last two years, but investors may now be more interested in other tech stocks poised to benefit from the AI boom, such as Broadcom (AVGO) and Palantir Technologies (PLTR).

Nvidia stock has outperformed all of its competitors in the Mag 7 group so far this year. Nevertheless, the stock has slowed down. Down 15% from highs, Nvidia's stock is technically in "correction territory." 

That said, Nvidia has not lost its fundamental edge, and will most likely continue to dominate the semiconductor sector with its high-performance GPUs for many years to come. 

Overall, on Wall Street, Nvidia stock remains a “Strong Buy.” Out of the 43 analysts covering the stock, 36 have a “Strong Buy” recommendation, three say it’s a “Moderate Buy,” and four rate it a “Hold.” The average target price of $174.95 suggests Nvidia stock can climb by 35.7% from current levels. Plus, the high price estimate of $220 implies an upside potential of 70.6% over the next 12 months.

The Bottom Line on Nvidia Stock

From AI infrastructure to enterprise software, Nvidia's diverse portfolio and thirst for innovation will most likely ensure its continued leadership in these rapidly growing areas.

As of Thursday, Nvidia’s stock closed at $130.68 per share, with a forward price-to-earnings (P/E) ratio of 44. While the company's growth prospects and strong market position are undeniable, the high valuation suggests that the stock is overvalued at this point. Given current market conditions and the potential for volatility, investors may want to wait for a better entry point. Accumulating Nvidia stock at lower levels, such as $115, $105, $100, or even $95, would be a more appealing option, particularly for those looking to invest with a margin of safety.