Generative artificial intelligence (AI) has taken Wall Street by storm since the launch of OpenAI’s ChatGPT in 2022. Few companies have benefited more from it than Nvidia (NVDA -2.50%) — the chipmaker that makes the hardware needed to make this new technology possible. A bombshell second-quarter earnings report suggests the boom is far from over.

Nvidia’s revenue rose 122% year over year to $30 billion, compared to analyst expectations of $28.7 billion. The growth was driven by demand for advanced graphics processing units (GPUs) such as the H200, which helps train and run AI algorithms. The company’s bottom line also remains positive, with net income up 168% to $16.6 billion.

How long can Nvidia’s rally last? Let’s take a closer look at what the next 12 months hold for the tech leader.

The bear case

Nvidia is becoming an increasingly polarizing stock. While few would deny its operational momentum, one has to wonder if the AI ​​industry is buying up its expensive hardware. So far, things haven’t been going smoothly.

While consumer-oriented large language models (LLMs) fun to play with, they seem far removed from a transformative tech megatrend. And even if these algorithms could become smart enough to make a big splash, their monetization potential remains unclear due to competition from free, open-source options like Meta’s Llama or Elon Musk’s Grok.

Analysts at Goldman Sachs (NYSE: GS) underscore this alarming dynamic. In a June report, they said: to suggest that the approximately $1 trillion that tech giants have invested in AI capital expenditures may never pay for itself. If Nvidia’s customers don’t start making a profit, they will eventually stop buying the company’s expensive chips. This will lead to a decline in sales and a reduction in margins.

With an underlying price-earnings ratio (P/E) multiple of 59 compared to the Nasdaq-100 average of 32, Nvidia’s valuation prices in significant future expectations. And if those don’t materialize, stocks could crash.

The bull case

At best, Nvidia’s long-term rally has only just begun. According to Bloomberg analysts, the generative AI industry is expected to expand at a rate of compound annual growth rate (CAGR) from 42% to $1.3 trillion by 2032, as investment shifts from training infrastructure to consumer applications such as software and advertising. If true, Nvidia’s current sales are a drop in the bucket compared to its long-term potential.

Management also opposes the suggestion that its customers are not making a profit on 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. During the earnings call, Kress claimed that $1 spent on Nvidia hardware could yield a return of $5 over the next four years. That number jumps to $7 for the company’s latest products, such as the HDX H200 AI accelerator. While the robust demand suggests that Nvidia’s cloud customers are seeing value in its hardware, Kress’s claims may a little bit misleading.

These companies are still serving the infrastructure side of the AI ​​market. They’re buying Nvidia GPUs to rent out to AI startups. If the consumer-facing startups can’t capitalize on the technology, they’ll eventually stop renting out GPUs and the cloud service providers will stop buying them.

Is Buying Nvidia Stock a Good Idea?

Nvidia is a great company because it sells products that the market wants. And the stock will likely continue to rise in the short term. However, the long-term fundamentals of demand for AI GPU products are shaky.

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