The Nasdaq rose to a new record high this year as investors poured into growth stocks, particularly those in the artificial intelligence (AI) space. This confirmed that the index was in a bull market, an investment environment that favors growth companies. And this dynamic may have just begun for two reasons.
First, the AI market is still in its infancy. Analysts predict a double-digit average annual growth rate for the next few years and a market volume of more than $1 trillion by 2030. Own operations or sell AI products and services to others.
The desired result? A boost in earnings. Investors also want in on these growth stories today and in the years to come, and that could drive shares of these companies and the Nasdaq higher.
Second, if history is anything to go by, the Nasdaq will continue to rise this year. Since 2009, the Nasdaq has risen for at least two years in the three periods of growth that followed years of decline. And in its second year, it achieved double-digit growth.
This year, the Nasdaq has pared its earlier rise and is up about 4.5% year-to-date. If the story is true, the index could skyrocket from this level. Here’s my top growth stock to buy beforehand.
Invest in AI
As I mentioned earlier, AI has been key to stock market gains recently, and that trend is likely to continue thanks to the long-term market outlook. Companies today have a lot to gain by investing in AI. This is great news for companies that produce the tools needed to unlock the power of this new technology. I’m talking about chip designers and manufacturers of various key elements such as servers or workstations.
Many of these companies stand to benefit, but one that stands to gain the most is the top chip designer Nvidia (NASDAQ:NVDA). The company’s graphics processing units (GPU) have become the gold standard for training and inference, key tasks that power AI models to do their job solving complex problems.
Nvidia’s GPUs are primarily used in the video game industry. However, seeing that their ability to process many tasks simultaneously could be useful in other areas, Nvidia developed CUDA, a parallel computing platform that allows GPUs to be used for general purposes, including AI. This led to a huge change in the company, and AI-related revenues now far exceed gaming revenues.
As a result, income has skyrocketed. In recent quarters they have increased by triple digits, and over the last five years profits have increased by more than 900% to about $29 billion.
Nvidia’s rival Intel
Although Nvidia now has 80% of the AI chip market, many competitors are eager to take market share. For example, Intel recently announced the upcoming launch of its Gaudi 3 AI accelerator, a chip that could outperform Nvidia’s H100 on certain major language models.
Although others will likely take some market share, I don’t see this as a threat to Nvidia or a move that will weigh on long-term earnings growth as the company continues to innovate and bring the best-performing chips to market first. The company recently announced the release (later this year) of its Blackwell architecture, which includes six key innovations including the world’s most powerful chip. A competitor’s chip today may currently outperform Nvidia’s chips, but that likely won’t be the case once Blackwell enters the scene.
Nvidia’s earnings growth and access to talent provide the company with the resources it needs to continue to innovate and stay at the forefront.
Today, even after rising 200% in the past year, Nvidia shares trade at 32 times earnings estimates – which seems reasonable for a leader in such a high-growth market. And analysts are forecasting 35% annual growth for the company over the next five years.
All of this makes Nvidia seem like a solid stock to buy right now. It could also help the Nasdaq move higher this year and beyond.
Should you invest $1,000 in Nvidia now?
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in Nvidia and recommends it. The Motley Fool recommends Intel and recommends the following options: long $45 January 2025 calls on Intel and short $47 May 2024 calls on Intel. The Motley Fool has a disclosure policy.
History says the Nasdaq will move higher this year. My top growth stock to buy beforehand. was originally published by The Motley Fool