Nvidia (NVDA -1.14%) is the most important hardware company in the artificial intelligence (AI) revolution today. Its high-end graphics processing units (GPUs) provide performance advantages that no other player in the space comes close to matching.
Thanks to incredible demand for its processors, Nvidia stock has been posting absolutely stellar performance. As of this writing, the company’s stock price is up roughly 141% over the last year of trading. With a market capitalization of roughly $3.3 trillion, the chipmaker stands as the world’s second-largest company — trailing only Apple.
Nvidia is now valued at roughly 45 times this year’s expected earnings and 25 times expected sales. But while the company trades at growth-dependent multiples and has historically been subject to cyclical pressures, there are several indicators that suggest the stock still has the potential to deliver big long-term upside.
Nvidia’s strength in software is still underappreciated
Given that it’s the dominant player in the market for AI GPUs, it’s not surprising that the narrative surrounding Nvidia centers on its hardware business. While demand indicators look strong for this year as AI infrastructure spending continues to ramp up, the chip specialist’s business has historically been shaped by cyclical trends. That makes valuing it based on its recent performance and short-term results somewhat problematic. It also partially explains why the stock isn’t trading even higher.
But while GPU sales will remain the most important part of Nvidia’s business for the foreseeable future, the market continues to underestimate the company’s strengths in AI software. For starters, the widespread popularity of the company’s CUDA platform is essentially locking the leading AI software players into its ecosystem.
But Nvidia is actually in the early stages of becoming a more software-focused company. In addition to ramping up its artificial-intelligence-as-a-service (AIaaS) processing offerings, it’s rolling out industry-specific AI tools and agentic AI services. These new software offerings set the stage for Nvidia’s business to become less cyclical, and it could power massive long-term growth.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool has a disclosure policy.
