Nvidia’s shares have soared by more than 22,000% over the last decade, generating substantial wealth for shareholders. However, with a market cap of $3 trillion, Nvidia is already the third-largest company in the world. Growing concerns about the sustainability of AI hardware spending raise questions about how much more it can realistically grow.
Since the launch of OpenAI’s ChatGPT in 2022, tech giants have been scrambling to stay competitive in the market for large language models (LLMs). They have poured billions of dollars into purchasing Nvidia’s cutting-edge graphics processing units (GPUs) to train and run these complex programs. For hyperscalers, this spending makes clear business sense because they can “rent out” their AI computing power to start-ups via their cloud computing platforms.
However, for other major clients like Meta Platforms, which plans to spend $60 billion to $65 billion largely on AI-related capital expenditures, the potential returns for pouring so much money into Nvidia hardware look weaker. Meta seems to be trying to stay relevant without a clear way to monetize this investment. It might only be a matter of time before the company’s shareholders push back against all this speculative spending.
While current AI spending may prove unsustainable in the long run, this challenge has yet to manifest itself in Nvidia’s operational results.
Nvidia’s growth sustainability concerns
Third-quarter revenue jumped 94% to $35.1 billion based on massive demand for its high-end data center chips to train LLMs.
Its gross margin of almost 75% rivals that of many software companies, helping operating income roughly double to $21.9 billion in the third quarter. Over the coming quarters, products based on Nvidia’s new Blackwell GPU architecture promise to support continued growth and profitability. So far, there is little evidence that the emergence of low-cost Chinese rivals like DeepSeek, which claims to have trained an industry-leading LLM on “primitive” H800 chips, is hurting demand for Nvidia’s newest chips.
At a price-to-earnings (P/E) ratio of just 29, the stock is surprisingly affordable considering its incredible growth rate. For context, the S&P 500 has an average forward P/E of 31, even though few of its members rival Nvidia’s business expansion. Yet, with a market cap of $3 trillion, it is hard to see Nvidia generating multibagger returns from here, especially considering that current AI hardware spending may begin to diminish over time.
Nvidia remains a strong player in the tech and AI hardware markets, but its days of exponential growth may be over. The enormous market cap and potential slowdown in AI hardware spending mean that the stock is unlikely to deliver the kind of outsized returns that made early investors millionaires. Investors might need to look elsewhere for high-growth opportunities in the AI sector.
