Will High-Level Artificial Intelligence (AI) Shares of Nvidia Overpower the Market by 2025?

Will High-Level Artificial Intelligence (AI) Shares of Nvidia Overpower the Market by 2025?

Nvidia (NVDA) has been dominating the market for a few years now, showing exceptional performance even when looked at over extended time frames.

However, 2025 is expected to be a mixed bag, bringing both opportunities and challenges.

Nvidia's revenue growth may slow down in 2025

2025 is likely to be quite different from 2023 and 2024 for Nvidia. Following its recent growth spurt, its year-over-year comparisons will be based on significantly higher baseline figures. As a result, its revenue growth rates (on a percentage basis) might not appear as impressive.

In 2023 and 2024, Nvidia recorded mind-blowing growth, with quarterly revenues sometimes jumping three times year over year.

This growth was primarily driven by the artificial intelligence (AI) technology boom. With prominent cloud infrastructure providers racing to develop advanced and innovative AI models, and aiming to reinforce other businesses' AI initiatives, they are working to enhance their computing power at a fast pace. Nvidia's graphics processing units (GPUs) are among the top hardware options for providing AI processing power, and the company has significantly benefited from this growth trend.

However, these cloud providers are far from completing their infrastructure expansions.

Meta Platforms announced that its capital expenditures in 2025 will exceed those of 2024. Major cloud computing providers also indicated they are investing heavily in infrastructure to address the escalating demand. For example, Microsoft is the second-largest provider of cloud infrastructure services, with its Azure service. On its latest quarterly earnings call, CFO Amy Hood stated, "We expect capital expenditures to increase sequentially due to our cloud and AI demand signals."

Given that Nvidia's major clients have signaled they will increase their capex spending in 2025 above the levels from 2024, Nvidia's sales should continue to grow in the following year.

But will this be enough to maintain Nvidia's market-beating performance?

2025 might present some challenges for Nvidia

One of the main obstacles for Nvidia's stock will be its valuation. The market has already factored in a substantial portion of future success into the current share price, making it challenging for the stock to make further gains from its current level.

As of now, Nvidia's stock trades at around 35.7 times its expected earnings for its fiscal 2026, which ends in January 2026. If this was Nvidia's trailing earnings metric, it would represent a high valuation. To achieve this status, Nvidia would need to meet Wall Street's expectations for the next five quarters or so while maintaining a relatively stable stock price.

Furthermore, the massive AI computing power expansion might begin to slacken towards the end of 2025, if hyperscalers feel they have already built enough processing power to meet demand.

However, I don't think these factors will have a significant impact. It's uncertain how much processing power we'll need to achieve the peak performance of these AI models, but I doubt we'll reach that limit in 2025. We're just starting to integrate these AI models, and many of the ones available today still have flaws.

The growing demand for AI computing power is likely to persist past 2025, so I'm not concerned about the potential downturn in GPU demand.

Regarding the company's valuation, however, I would not be surprised if its premium begins to lessen due to "slower" growth. Although the average projection from 52 analysts tracking the company is for revenue growth of 44% next year, this slower growth might result in reduced stock price gains, but not to the extent of making Nvidia a market laggard.

Nvidia's stock price won't triple as it did in 2023 and 2024. However, I believe the growth case is strong enough that the stock should still be able to grow by at least 10% next year, making it a stock that investors should consider buying before 2025 begins.

In light of Nvidia's expected revenue growth rate decrease due to its high baseline figures, investors may need to reevaluate their investing strategies involving Nvidia's stocks, considering potential lower percentage growth compared to previous years.

Given the significant investments in infrastructure by major cloud providers like Meta Platforms and Microsoft in 2025, coupled with the ongoing demand for AI computing power, Nvidia should still experience growth, albeit likely at a more moderate pace compared to its remarkable 2023-2024 growth spurt.

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