The artificial intelligence spending frenzy has been a boon to Nvidia shareholders. The company's share price has skyrocketed since OpenAI's ChatGPT kick-started a tsunami of investment in training and operating large language models and agentic AI programs.
A 755% gain in Nvidia's stock price since 2022 and a 171% gain in 2024 has been game-changing for many, but investors are right to wonder what could happen next.
Most have gotten on board the Nvidia train, leaving fewer on the sidelines that could continue to bid shares higher. Worry has crept in that IT budgets may reset priorities, and because of the law of large numbers, Nvidia's breakneck growth rates are slowing, adding to concerns.
While the meteoric rise in Nvidia's stock caught some flat-footed, long-time fund manager Chris Versace wasn't surprised by the company's rally last year.
Recognizing the seismic shift, he picked up shares one year ago and steadily bought more throughout its epic run higher.
Versace, who has navigated stocks professionally since the 1990s, recently updated his Nvidia stock forecast following the company's latest earnings report. Given his experience and track record, investors should pay attention to what he thinks happens to Nvidia stock next.
Jensen Huang's Nvidia has seen huge demand for its next-generation artificial intelligence chips.I-HWA CHENG/Getty Images
Nvidia rides a huge wave of AI-driven demand
Artificial intelligence's potential has been debated for decades. In the 1950s, mathematician and computer scientist Alan Turing researched designing AI computers, and the Rand Corporation created the first AI program in 1956. Over the years, many science fiction books and movies, from Isaac Asimov's iRobot to The Terminator and beyond, have entertained the possibility that machines could think for themselves someday.
Clearly, AI as a concept isn't new. However, it's only recently that the reality of AI's impact on people and business has gone mainstream after ChatGPT's launch (it was the fastest application to reach one million users) and the ensuing roll-out of many ChatGPT competitors, including Alphabet's (GOOGL) Gemini.
Militaries are researching AI's use on the battlefield, banks like JP Morgan Chase are using it to hedge risks, healthcare companies are examining its use in drug development, and retailers are seeing whether AI can curb theft and improve supply chains.
To tap into those opportunities, IT budgets have increased dramatically. Last year, Microsoft, Google, and Amazon alone spent $192 million on the stuff necessary to build their businesses, up from capital expenditures of $117 billion in 2023.
Undeniably, Nvidia has been the biggest beneficiary of the spending. Like the shovel sellers in the 1800s gold rush, sales of Nvidia's high-performance software and graphic processing units, or GPUs, have surged.
GPUs like those made by Nvidia are far better suited to handle AI's intense workloads than the traditional central processing units (CPUs) previously found in most enterprise and cloud networks.
Unsurprisingly, Nvidia's revenue and profit has taken off. Sales of H100, H200, and the latest Blackwell AI chips have catapulted annual revenue to over $130 billion (up 114% year-over-year) from $27 billion in 2023. Meanwhile, net income has increased to nearly $73 billion from less than $5 billion in 2023.
Nvidia challenges mount into 2025
The market demand for Nvidia's AI chips is global. However, previously a key market, sales to China have dropped because of stringent export restrictions designed to limit the sale of next-gen technology from U.S. companies to potential rivals overseas.
Not long ago, China represented over 20% of its data center sales. According to CEO Jensen Huang, nowadays, "it's about half of what it was before the export control."
That's not the only challenge. Nvidia is also facing increased competition, including from rival Advanced Micro Devices (AMD) and specially designed chips that can be used as an Nvidia alternative, including chips made by Broadcom (AVGO) .
In 2024, both companies reported robust sales growth from increased AI demand. AMD's data Center segment revenue reached a record $12.6 billion, prompting AMD's CEO Lisa Su to say, "Looking into 2025, we see clear opportunities for continued growth based on the strength of our product portfolio and growing demand for high-performance and adaptive computing.”
Last year, Su predicted the AI-GPU market would grow by an average of 73% annually to $400 billion through 2027.
With such a big market opportunity, it's little wonder rivals are tripping over themselves to catch up to Nvidia.
Another growing concern is that Nvidia's best days may be behind it. It's enjoyed substantial and profit-friendly pricing power amid demand outstripping supply. However, as supply begins to catch up with demand and investment in newer, better chips like Blackwell rises, gross margin pressures could increase.
We're already seeing that play out.
After reporting fourth-quarter earnings, Nvidia's shares slumped about 5%, largely because its gross margin shrunk to 73% from 76% a year earlier.
Veteran fund manager updates Nvidia outlook after earnings
Versace thinks Nvidia's earnings were solid, and he's still a fan of the company and its potential, but he's also a realist.
"Even though some on Wall Street are nudging their price targets higher by a few dollars, following last night’s earnings report from Nvidia, we are maintaining our $175 price target," said Versace in a TheStreet Pro post. "We’re going to see some EPS re-jiggering largely due to Nvidia’s gross margin guidance. The company sees its non-GAAP gross margin falling to 70.6% to 71.0% in the current quarter, down from 73.5% in the January quarter and 75.0% the one before that."
The pressure on Nvidia's profitability may be short-lived, but that doesn't mean that investor hand-wringing will not keep a lid on its stock price in the short term.
"What’s weighing on those margins, at least in the near term, is the continued ramp of Nvidia’s Blackwell solutions," noted Versace. "As production matures, Nvidia’s management expects those margins will return to the mid-70s “later this year.”
Margin headwinds aren't great, but they're not unexpected as Nvidia ramps up investments to capture a huge market opportunity. As Versace points out, "While there is fodder for the Nvidia bulls and bears... the reality is that we are still in the early innings when it comes to AI."
What will it take for Versace to increase his price target?
"Rather than assume the margin impact of the Blackwell ramp will be limited to one or two quarters, we’ll look for confirmation margins are getting back on track before revisiting," concluded Versace.
