Nvidia (NVDA 0.53%) isn’t just leading the artificial intelligence (AI) infrastructure boom: It is the boom. Its graphics processing units (GPUs) have become the backbone of AI data centers, while its CUDA software has helped create a huge moat around its business.
Over the past two years, data center revenue has exploded by more than 9x, going from $4.3 billion to $39.1 billion. For a company of Nvidia’s size, that kind of growth is almost unheard of.
That momentum has pushed Nvidia past the $4 trillion market cap mark, which is an extraordinary accomplishment. It’s also done it quickly, jumping from $1 trillion to $4 trillion in just over a year. At this point, I think predicting that the company will hit $5 trillion by year-end isn’t much of a stretch. It’s only about a 25% gain from here, and the setup remains strong.
Nvidia’s valuation is still reasonable. While its forward price-to-earnings (P/E) ratio has crept up to 38 times based on this year’s analyst estimates, its forward price/earnings-to-growth (PEG) ratio is just more than 0.8, with PEGs below 1 signaling a stock is undervalued.
Meanwhile, investors will soon start to turn to 2026 estimates when looking at valuations, and the stock trades at only a 28.5 P/E ratio and less than a 0.8 PEG on next year’s analyst consensus. A 25% increase in Nvidia’s stock price is getting you to around a 35.5 times P/E and a 1 PEG, which would still be reasonable.
The CUDA moat
Nvidia’s biggest advantage comes from its CUDA software platform. GPUs were originally designed to speed up graphics rendering in video games. However, Nvidia saw a bigger opportunity and built CUDA as a way to let developers program its chips for other purposes.
Although GPU usage for other tasks didn’t take off immediately, Nvidia smartly pushed CUDA into universities and research labs, which is where early AI work began. That long-term bet eventually paid off in a big way.
CUDA became the platform that developers learned to program GPUs on, and the more it was used, the more tools were built for it. That network effect helped Nvidia extend its lead, and last quarter it captured a 92% market share in GPUs, largely due to CUDA. AMD‘s ROCm software platform has improved, but it’s still miles behind in terms of ease of use, documentation, and developer support.
Image source: Getty Images.
Data center demand isn’t slowing down
Nvidia’s core market remains AI training and inference, and the demand for its chips shows no signs of easing. Companies are spending aggressively to build out large language models, while cloud computing companies and other hyperscalers (companies with massive data centers) are racing to scale out their infrastructure. Nvidia, meanwhile, is the company powering this buildout.
Nvidia’s CEO Jensen Huang has predicted that data center spending tied to AI will exceed $1 trillion by 2028. Not all of that will go to Nvidia, but given its leadership in GPUs, the company is well positioned to take a big piece. It also continues to innovate at a rapid pace. Its chip release cycle has sped up, with new architectures set to be introduced every year instead of every two. That should help lock in its lead and keep it ahead of rivals.
Even if data center growth slows from here — and at some point it will — Nvidia still has more levers to pull. Data centers aren’t its only growth engine. The company’s auto business is gaining traction. Last quarter, auto revenue surged 72% to $567 million. That’s a fraction of its data center business, but Nvidia expects it to hit $5 billion this year.
The ramp-up in the auto sector is coming from robotaxis and smart vehicles. Alphabet‘s Waymo uses Nvidia chips in its robotaxi fleet, and it’s now running more than 250,000 paid rides per week. That’s just the start. Mercedes, Toyota, and Volvo are all using Nvidia’s DRIVE platform for advanced driver assistance and autonomy. General Motors and Hyundai, meanwhile, are using Nvidia technology in their smart factory initiative.
Nvidia projected in 2022 that its auto opportunity could reach $300 billion. Given the advancements in autonomous driving, that number doesn’t look farfetched.
Is the stock a buy?
With the stock already hitting a $4 trillion market cap, a move to $5 trillion is well within reach. That’s a solid 25% return from current levels, which would still make the stock a buy.
As long as AI infrastructure spending continues to ramp up, Nvidia is a stock you want to own.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, and Nvidia. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.
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