The extent of Nvidia's (NASDAQ: NVDA) growth over the last three years came as a surprise to most investors. The stock spent most of 2022 selling off along with its tech peers. However, the company once known best for gaming and graphics processing units (GPUs) experienced an unprecedented surge amid the spike in demand for its leading artificial intelligence (AI) chips.
Even when including the 2022 pullback, Nvidia stock rose by around 560% over the last three years. Given that massive gain, the question now may be what will happen to the semiconductor stock over the next three years.
Making sense of Nvidia
Admittedly, it is often hard to imagine where a company can go next when it has climbed to the pinnacle of its industry like Nvidia has. For all the talk of AI accelerators from AMD, Qualcomm, and others, Nvidia is the dominant company, and competitor alternatives are unlikely to catch up to it anytime soon.
Predicting how the AI accelerator market will look in three years is speculation. Still, observers know that the data center segment, which develops AI accelerators, now accounts for 88% of Nvidia's revenue. It wasn't even Nvidia's largest revenue source three years ago.
Also, competition is rising. AMD plans to release its MI325X accelerator in the first quarter of 2025. That still lags behind the release of Nvidia's upcoming Blackwell accelerator, which is expected to come out in the current quarter.
Still, Oracle chose AMD's chips to power the newest OCI Compute Supercluster instance. AMD has also indicated that Microsoft, Meta Platforms, and OpenAI have used its AI GPUs in some instances.
Nonetheless, Nvidia still controls up to 90% of the AI chip market, according to some estimates. Additionally, Nvidia's CUDA programming language keeps more users in its ecosystem, a factor likely to reinforce its dominance as other companies compete for a place in the AI chip industry.
Nvidia by the numbers
That knowledge has taken Nvidia stock into the stratosphere. Indeed, revenue for the first half of fiscal 2025 (ended July 28) was $56 billion, a 171% increase compared to the same period in fiscal 2024. However, such growth rates are unlikely to be sustainable, meaning growth will be significantly less, assuming sales are still rising.
Nvidia has other challenges if one looks below the surface. Its recent price-to-earnings (P/E) ratio of 62 may appear cheap, considering that Nvidia's net income surged 284% higher in the first half of fiscal 2025 compared with the same period in the prior year. Even though analysts forecast only 43% profit growth in fiscal 2026, the earnings multiple could continue to appear low.
Nonetheless, other valuation metrics might give the most risk-tolerant investors pause. The price-to-sales (P/S) ratio now stands at around 34, approximately triple AMD's sales multiple of less than 11. Moreover, Nvidia trades at an astounding 56 times its book value, far above AMD at a price-to-book value ratio of less than 5.
Hence, as revenue growth slows, investors may start to question whether Nvidia stock is still worth its premium. That may place considerable pressure on Nvidia's stock, possibly more than it can recover from over the next three years.
Nvidia's trajectory over the next three years is uncertain, and investors could struggle with this stock as business conditions force the market to come to terms with a very likely growth slowdown.
Indeed, Nvidia will likely remain a dominant company in a very lucrative AI chip industry. This should mean that Nvidia will remain a winner for investors planning to hold the stock for five years or more.
Unfortunately, rising competition will likely end its triple-digit revenue growth, and the company appears already on track for net income to slow to double-digit levels.
Additionally, its sales multiple and price-to-book value ratio point to considerable overvaluation. Thus, Nvidia could face deceleration in the near term and possibly over three years as its stock adjusts to a coming slowdown.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has positions in Advanced Micro Devices and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Qualcomm. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Where Will Nvidia Stock Be In 3 Years? was originally published by The Motley Fool