Following the launch of OpenAI’s ChatGPT in 2022, generative artificial intelligence (AI) has taken Wall Street by storm. Few companies have benefited more than NVIDIA (NVDA -2.10%) – the chipmaker that makes the hardware that enables this new technology. An explosive second-quarter earnings report suggests the boom is far from over.

Nvidia’s revenue rose 122% year-on-year to $30 billion, compared to analysts’ expectations of $28.7 billion. The growth was driven by demand for advanced Graphics processing units (GPUs) like the H200, which helps train and execute AI algorithms. The company’s bottom line also remains positive, with net profit increasing 168% to $16.6 billion.

How long can Nvidia’s upswing continue? Let’s take a closer look at what the next 12 months could hold for this technology leader.

The Bear Case

Nvidia is becoming an increasingly polarizing stock. While few would deny its operational momentum, we doubt the AI ​​industry is buying up its expensive hardware. So far, things aren’t going well.

While the customer-oriented large language models (LLMs) are fun, but they don’t seem to be a transformative tech megatrend yet. And even if these algorithms could become smart enough to make a splash, their monetization potential remains limited due to competition from free, open-source options like Metas Lama or Grok by Elon Musk.

Analysts from Goldman Sachs (GS -0.78%) highlight this alarming dynamic. In a report from June suggest that the tech giants’ investments of around one trillion US dollars in AI may never pay off. If Nvidia’s customers don’t make profits, they will eventually stop buying the company’s expensive chips, leading to declining revenue and margin erosion.

With a trailing Price-earnings ratio (P/E) Multiple of 59 compared to Nasdaq-100 With an average of 32, Nvidia’s valuation includes significant future expectations. And if these do not materialize, the share price could crash.

The Bull Case

In the best case scenario, Nvidia’s long-term rally is just beginning. According to Bloomberg analysts, the generative AI industry could compound annual growth rate (CAGR) by 42% to $1.3 trillion by 2032 as investments shift from training infrastructure to consumer use cases like software and advertising. If true, Nvidia’s current revenues are a drop in the bucket compared to its long-term potential.

Management also defends itself against the suggestion that its customers will not benefit from their AI investments.

Image source: Getty Images.

Nvidia CFO Colette Kress claims that cloud computing providers are seeing an “immediate and strong return” on AI investments. On the earnings call, Kress claimed that a dollar spent on Nvidia hardware could yield $5 over the next four years. That figure rises to $7 for the company’s latest products, like the HDX H200 AI accelerator. However, while robust demand suggests that Nvidia’s cloud customers see value in its hardware, Kress’ claims could be false. a little misleading.

These companies still serve the infrastructure side of the AI ​​market. They buy Nvidia GPUs to rent to AI startups. If the consumer-facing startups can’t monetize the technology, they will eventually stop renting GPUs and the cloud service providers will stop buying them.

Is Nvidia stock a buy?

Nvidia is a great company because it sells products that the market wants, and its stock is likely to continue rising in the near future. However, the fundamentals of long-term demand for AI GPU products are shaky.

This hype-driven industry could see a reckoning in the next 12 months if the software side of the opportunity doesn’t show more progress toward monetization. Investors should consider taking profits or avoiding Nvidia stock until more information is available.