The Dow Jones Industrial Average is the oldest stock market index in the U.S. This price-weighted index tracks the performance of 30 of the largest publicly traded companies in the country. Its constituent companies span a variety of industries and sectors, and it's considered by many to be a dependable indicator for the health of the economy and of stock market performance in the U.S.
Nvidia(NASDAQ: NVDA) is the most recent addition to the Dow, a move some investors thought was long overdue. The chipmaker joined the iconic index early last month and has gained 163% so far this year (as of this writing), making it the Dow's top performer.
Despite its top-ranking performance, some investors have concerns about the future of artificial intelligence (AI) and Nvidia's seemingly frothy valuation. These questions have weighed on the stock, which is essentially flat over the past six months. While some investors are skittish, I'm not among them. In fact, Nvidia is my highest-conviction stock heading into 2025. Let's look at the available evidence to understand why Nvidia could still produce blistering gains for astute investors.
Image source: Getty Images.
The AI processing pioneer
Nvidia originally developed the graphics processing unit (GPU) to render lifelike graphics in video games, a task that required tremendous computational horsepower. At the time, the GPU provided a novel solution, breaking up a massive computing job into smaller, more manageable bits.
Nvidia quickly discovered that the solution, known as parallel processing, worked equally well for other computationally intensive tasks. The company began marketing GPUs for high-performance computing (HPC). The biggest breakthrough came in 2013 when researchers used GPUs to power deep learning, a predecessor to modern AI. CEO Jensen Huang realized AI was the future and positioned Nvidia to reap the rewards.
The move was prescient. Most AI processing occurs in the data center, and Nvidia controlled an estimated 98% of the data center GPU market in 2023, according to semiconductor analyst firm TechInsights. While that share is expected to moderate somewhat when the books are closed on 2024, Nvidia is expected to remain the industry leader by a wide margin.
The numbers are persuasive
There's no denying that Nvidia has been an early beneficiary of the growing adoption of generative AI. Even in the face of tough, triple-digit comps from last year, its recent results were enviable. For its fiscal 2025 third quarter (ended Oct. 27), Nvidia generated record revenue of $35 billion, which soared 94% year over year and 17% sequentially. This resulted in adjusted earnings per share (EPS) of $0.81, which surged 103%.
A performance of that magnitude suggests the adoption of AI continues at a brisk pace. Yet despite its record results, the decelerating growth has some convinced the early opportunity has passed -- yet the evidence suggests otherwise.
Does AI have staying power?
A report by the Wharton School of Business found that companies are beginning the transition from "initial excitement to deeper experimentation" to better understand the best way to deploy AI to profit their businesses.
Furthermore, a survey of 800 business executives found that weekly usage of generative AI has increased from 37% in 2023 to 72% in 2024. The most common use cases include data analytics, contract drafting, and idea generation, and leaders are identifying more targeted applications, which will continue to drive AI adoption for years to come.
Looking closer to home, commentary from Nvidia's biggest customers provides compelling evidence that the AI revolution is ongoing. During their respective earnings calls with analysts, Amazon, Microsoft, Alphabet, and Meta Platforms pledged to continue spending heavily on AI, with the bulk of those expenditures allotted to the servers and data centers that facilitate the technology.
As the undisputed leader in the data center GPU space, Nvidia will likely win the lion's share of that spending.
Enter Blackwell
Nvidia stock has soared over the past couple of years as its processors became the gold standard for AI, cornering the data center GPU market -- where most AI processing takes place.
The company's Blackwell family of AI-centric data center chips is due to begin shipping later this year, taking AI to the next level. Just last month, CFO Colette Kress said, "Blackwell demand is staggering, and we are racing to scale supply to meet the incredible demand customers are placing on us."
Beth Kindig, CEO and lead tech analyst for the I/O Fund, calculates that over the coming year, Blackwell chips will outsell all of Nvidia's data center GPU sales for the past two years -- combined. That could lead to as much as 70% upside for Nvidia stock in 2025.
The evidence is clear
Taken together, its robust results, the ongoing adoption of AI, and Nvidia's dominance in the data center GPU market suggest the future looks extremely bright for the GPU maker.
While some investors are concerned about the stock's valuation, that requires context as well. Nvidia currently sells for 51 times sales, which seems expensive at first glance. However, over the past 10 years, Nvidia's average price-to-earnings (P/E) ratio has clocked in at about 59, which suggests the current price is historically cheap. Furthermore, Wall Street expects Nvidia to generate EPS of $4.43 in fiscal 2026 (which begins in late January). That works out to roughly 29 times forward earnings, which is an attractive price to pay for a company with so much upside potential.
That's why Nvidia is my highest-conviction stock heading into 2025.
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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. Danny Vena has positions in Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. 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.
