Nvidia’s share price has rocketed 180% so far this year, vastly outperforming all other S&P 500 companies. This meteoric rise reflects strong investor confidence in Nvidia’s leadership position in artificial intelligence (AI) semiconductors and software.

The Santa Clara, California-based technology company now boasts an elite market valuation surpassing $1 trillion. This places Nvidia alongside tech titans Apple, Microsoft, Amazon and Alphabet in the prestigious trillion-dollar club.

Nvidia’s Pivotal Role Powering AI Models

While originally known for its graphics processing units (GPUs) used in video games, Nvidia generates most revenue today from its data center segment focused on AI computing.

Sales in this business jumped 41% last fiscal year to $15 billion, overtaking Nvidia’s gaming revenue for the first time. For fiscal 2024, Wall Street analysts predict Nvidia’s data center sales will nearly double to over $31 billion.

“Nvidia controls 80% or more of the AI chip market,” said Patrick Moorhead, President and Principal Analyst at Moor Insights & Strategy. The company’s proprietary CUDA software and GPU hardware dominate AI model training and inference workloads.

This first-mover advantage has positioned Nvidia to capitalize on explosive demand growth as AI enters the mainstream. For example, OpenAI’s wildly popular ChatGPT chatbot runs on Nvidia chips, as do AI systems from numerous other tech startups.

Growth Assumptions Baked into Sky-High Valuation

Nvidia stock trades at a steep valuation, reflecting massive assumed growth priced in by investors. The current price-to-earnings ratio stands at an extremely rich 220x.

Analysts estimate Nvidia’s net income will nearly quadruple in fiscal 2023. The stock could retreat if actual earnings disappoint lofty expectations.

However, Nvidia exceeded Q4 estimates and has reportedly secured additional manufacturing capacity. Major cloud providers also plan sizable data center buildouts relying heavily on Nvidia technology.

“They have the highest performance training hardware and software libraries,” Moorhead explained. “This makes switching more difficult for AI developers.”

Long-Term Opportunity Still Compelling for AI Leader

Nvidia spent 15 years methodically developing its AI computing capabilities. In March 2007, the company launched its breakthrough CUDA software framework to accelerate AI workloads using GPUs.

This prescient move provided Nvidia with a multi-year head start over rivals in AI chips. Today, pioneering AI labs like DeepMind and OpenAI all run their models on Nvidia GPUs.

Now Nvidia is investing in numerous AI startups to strengthen its competitive position. The company also funds development of new applications demonstrating its platform’s capabilities.

Nvidia CEO Jensen Huang called AI “a new computing era” poised to broadly transform society. He compared the recent ChatGPT phenomenon to the iPhone’s introduction in terms of potential impact.

While risks exist, Nvidia’s commanding position in the critical AI chip market gives it an enviable long-term outlook. The company pioneered GPU computing for AI over a decade before the current hype cycle.

Patient investors could still benefit from secular tailwinds driving Nvidia’s growth for years to come. But expect some volatility along the way.

To stay on top of the latest Nvidia developments and other stock analysis, be sure to check back regularly. Our financial experts parse earnings reports, track opportunities and analyze emerging industry trends. Get the full story to invest wisely.

Feel like Supporting the author for his work, you can buy him a coffee.