Where will Nvidia stock be in a year?

The rollercoaster doesn't seem to stop Nvidia (NASDAQ:NVDA). At the heart of the artificial intelligence (AI) boom has also been the main driver of the S&P 500 The performance of the index since the end of 2022. This year alone, about a quarter of the index's 20 percent increase can be attributed to the chip manufacturer.

That's a big burden on Nvidia's shoulders. Investors focus heavily on its every move and view it as a model for the entire market. So the good news for investors is that the AI ​​giant is moving full steam ahead. The company will face challenges and overcome obstacles, but Nvidia has several catalysts that could boost its bottom line in the not-too-distant future. What will next year bring for Nvidia?

The demand for bread and butter is still very high

The extremely powerful chips that the company develops and sells are the backbone of its success. That's why investors were rattled when the company announced its first real glitch since the AI ​​boom began. Production issues have been identified with the latest version of its AI chips, which was originally scheduled to launch in the third quarter. These chips, called Blackwell, are now expected to hit the market a quarter later in the fourth quarter. Fortunately, this delay is shorter than some feared, and the company assured investors that the delay was factored into its forecasts.

What is crucial is that short-term losses in Blackwell chips are offset by the still extremely high demand for the current generation Hopper chips. When Blackwell actually begins rolling out, the company expects demand to be even stronger. As CEO Jensen Huang put it, “The anticipation for Blackwell is incredible.”

Even though Nvidia has generally kept its promises in the past, it's a good idea to take a company's promises with a grain of salt. Company management has been somewhat reticent about the details of the delay, and there's always a chance that things won't go as planned. If further delays are announced, it could spell trouble for Nvidia. Still, I see no reason to believe that this will happen here or that this will become a major problem.

Nvidia makes more than just its flagship chips

Nvidia's data center segment, which includes the company's AI chips, is by far its most lucrative. I think the following graphic illustrates how important the segment is to the company.

Do you see this incredible turning point in 2023? This is almost entirely due to data center growth.

Now its chips are undoubtedly the heart of it, but it's not the only product the company offers in this segment. Nvidia aims to be a full-service provider of data center hardware and software. Nvidia has a platform called Spectrum-X, which only launched last year but has already seen a sharp increase in sales.

The platform is a networking solution that enables customers to keep up with the intensive networking demands of AI computing without sacrificing Ethernet. Ethernet – a network technology – has been the standard for decades and is used in almost every data center in the world. As Nvidia continues to build ever more powerful chips, existing Ethernet networks are struggling to keep up with the flow of data, creating a bottleneck.

This could mean upgrading a data center, removing the miles of Ethernet cables and associated hardware and replacing them with faster technology. Keep in mind that these data centers are huge – in some cases we're talking the size of several football fields – so you can imagine this would be incredibly costly. Spectrum-X ensures that the basic framework of these networks is preserved and only critical parts of the network infrastructure are updated. This is a huge cost savings for data centers.

Nvidia leadership was excited about Spectrum-X in the company's most recent earnings release. CFO Colette Kress reported that sales of Nvidia's “Ethernet for AI” – of which Spectrum-X is primarily a part – “have doubled sequentially as hundreds of customers adopted our Ethernet offerings” and that the platform “has a broad “Enjoys market support from OEMs and other companies”. ODM partner.” The company expects Spectrum to be a billion-dollar product line in a year.

Additionally, Nvidia is launching new software to help companies develop tailored AI solutions and is pushing further into the automotive industry, a segment that could be huge in a few years once driverless technology matures. However, in the short term, this will still be a significant source of revenue as AI is integrated into cars' “infotainment” systems. This is already happening, but we can expect more car manufacturers to advertise this system in the coming year.

Nvidia is on the right track

Without giving specific details on a price target, I think Nvidia will outperform the market in the coming year. Yes, at a price-to-earnings (P/E) ratio of 56.07, the company does have a premium, but it is pretty much at or below the level at which it has been trading since the beginning of 2020. Furthermore, its forward P/E ratio is currently 34.2, slightly below the average since the AI ​​boom began. Given Nvidia's growth potential, these numbers seem good to me.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in Nvidia and recommends it. The Motley Fool has a disclosure policy.

Where will Nvidia stock be in a year? was originally published by The Motley Fool