Is Nvidia the Future of AI or a Bubble Waiting to Burst?

Nvidia (NASDAQ: NVDA) has been on an incredible run since the start of 2023. The stock has risen around 700% and has been powered by impressive revenue and earnings growth along the way. A direct line can be drawn from this performance to artificial intelligence (AI) demand.

But when massive hype surrounds a technology, companies involved in it can be caught up in an investing bubble. When this bubble bursts, it could take years (or decades) to recover. So, is Nvidia the provider of the future? Or is it a bubble waiting to burst?

Perhaps the best comparison to today’s AI gold rush is the internet boom in the late 1990s and early 2000s. Companies like Cisco and Oracle were spearheading the stock market with the networking equipment needed to proliferate on the internet. However, that bubble burst, and it took Oracle nearly two decades to set a new high, while Cisco is still below its all-time high.

Could this be in Nvidia’s future?

One of the major differences between what happened in the early 2000s and what is happening now with AI is the speed of the buildout. The internet didn’t go up overnight, and the demand was less than expected. For Nvidia, which builds the graphics processing units (GPUs) that do the heavy lifting of AI model training, the demand does exceed expectations.

Nvidia is selling billions of dollars’ worth of GPUs every quarter, a number that has steadily risen over the past few quarters. Furthermore, with the big tech companies purchasing most of these GPUs and telling investors that 2025 will be another year of heavy capital expenditures due to building out the computing power needed for a leading AI model, Nvidia is likely in good shape from a demand perspective.

While the demand is there, the stock could still be considered overvalued and stuck in a bubble if the business can’t deliver enough growth. But is that the case?

Right now, Nvidia recently traded for about 68 times trailing earnings, which is very expensive. But that’s the wrong metric to use here because its business is rapidly evolving. Instead, I’ll use the forward earnings ratio (P/E), which uses analyst projections for the next 12 months. It isn’t perfect, but it provides a better picture because the market is a forward-looking machine.

From that perspective, Nvidia trades at about 43 times forward earnings. Which still isn’t cheap but isn’t as bad. By using those two metrics, investors can calculate that analysts project about 59% earnings growth over the next year.