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Nvidia (NASDAQ: NVDA) is one of the hottest stocks on the market: Find me another company that grew its revenue by over 100% year over year to more than $13.5 billion. The stock has responded in kind and is up roughly 230% this year.

That kind of performance is far from common in the stock market and leads to more questions than answers. So, if you’re looking for guidance on what to do with the stock, take a look at the bear and bull cases for Nvidia.

The bull case: AI is having a huge effect on Nvidia’s business

Artificial intelligence (AI) is the catalyst Nvidia has been waiting for. To create an AI model, massive amounts of data must be processed, which requires the most powerful computational devices available: graphics processing units (GPUs).

Nvidia makes the market’s best GPUs, and when a company builds a data center to harness AI’s capabilities, it doesn’t buy just one GPU, but thousands of them to multiply its capabilities.

This bodes well for Nvidia as the AI arms race begins. Since its GPUs are the starting point for many clients when building out AI capability, it is one of the first companies to benefit.

And even though the fiscal 2024 second quarter (ending July 30) was impressive, the third quarter is slated to be even more so. Management expects revenue to be about $16 billion, for year-over-year growth of 170%.

And because Nvidia’s products are in high demand, it can charge a premium for them, so its gross profit margins have drastically improved as well.

NVDA gross profit margin (quarterly) data by YCharts.

Because the company has already spent to build out its facilities and employee base, this massive revenue jump is having an even greater effect on profits. Earnings per share (EPS) were up an astounding 843% in the second quarter and should have a similar improvement in the third.

That outlook is why Nvidia’s forward price-to-earnings ratio doesn’t look nearly as pricey as its trailing one.

NVDA PE Ratio data by YCharts.

Still, forward-looking valuations rely on analyst estimates, which could be wrong. This notion leads me to my bear case.

The bear case: The AI rush is just a flash in the pan

The obvious question here is: How long will this AI-driven demand last? We’ve recently seen Nvidia go through a demand-and-crash cycle with GPUs dedicated to mining cryptocurrency, and while AI likely has more staying power than crypto, how many data centers really need to be built to make this a reality?

Once a company builds its AI-powering data center, will it return for seconds? Or is one enough? No one has the answer to these questions because we haven’t seen the true effect AI has had on businesses. While there’s a possibility it will be a real game changer, customers may be satisfied with the handful of supercomputers they have already constructed.

However, nobody knows when (or if) this will occur, so while sounding pessimistic might seem prudent, it discounts the potential of a true paradigm shift.

What should investors do with the stock? I’d say they should be careful. I think that the chances of Nvidia’s revenue quickly falling off a cliff later next year after the initial AI demand is fulfilled are about equal to the chances that the buildout will take a couple of years.

Because of that, I wouldn’t let Nvidia become a massive chunk of a portfolio. By taking some gains now, you’re left with increased upside while also banking some of the huge profits you’ve made since the beginning of the year.

Nvidia is a true unknown in this market, which is part of the allure of investing in it. But investors must be vigilant with these types of stocks, as the story can shift immediately.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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