Nvidia (NASDAQ: NVDA) has been at the center of the artificial intelligence (AI) boom over the past several years, and the stock has benefited greatly along the way. The question now is what happens next.
Investors already know that Nvidia's stock has been a great performer, but can it continue to outperform moving forward? Let's look at why I think the stock is set up to continue to outperform and where the stock price might head over the next three years.
Nvidia's strength and growth opportunities
Nvidia has become the clear market leader in graphics processing units (GPUs), which are the main chips used in data center infrastructure to power AI workloads. The company's dominance, however, comes from more than just designing great chips. Its moat comes from the ecosystem it's built around its chips.
This ecosystem starts with its software platform CUDA, which it developed as a way to let developers program its chips for purposes other than their original intent. It's sometimes easy to forget that GPUs were originally developed to help speed up the rendering of graphics in video games.
While uptake outside of video games was initially slow, Nvidia made the smart move to give away its CUDA software to universities and research groups, which is where early AI development was being done. This also led to an entire generation of developers being trained on its platform, creating a sticky user base. Over time, these developers also built tools and libraries on top of CUDA. That is one of the big reasons why it is difficult for customers to move away from Nvidia, as they would have to rewrite a large amount of code and retrain staff, which just isn't worth it.
Nvidia didn't just stop with software, though; it also turned networking into a huge strength. Nvidia's NVLink technology lets its GPUs act together as a single system, which is critical for training AI models that keep getting bigger. While rivals are trying to develop an open-source competing interconnect system, for now, AI clusters work best when all the chips are Nvidia’s GPUs. Its past deal for Mellanox added even more networking power. The company's networking strength was seen last quarter when its networking revenue nearly doubled to $7.3 billion.
Nvidia's wide moat with CUDA and its networking platform led to a remarkable 94% market share in the GPU space in Q2. The company saw rapid growth once again despite not selling any of its H20 chip to Chinese customers last quarter, which it said was about an $8 billion lost opportunity. Overall, its Q2 revenue soared 56% to $46.74 billion, with data center revenue surging 56% to $41.1 billion. Adjusted EPS, meanwhile, jumped 52% to $1.05.