Nvidia Just Did This For the First Time Since October. Here's What Happens Next, According to History.

Buying shares of Nvidia (NASDAQ: NVDA) represented a clear path to a stock market win in recent years. The artificial intelligence (AI) boom has made the company's AI chip systems some of the most sought-after products on the planet -- and this has translated into explosive earnings growth and a soaring stock price. Over the past three years, for example, revenue and the stock price each jumped more than 200%.

But in the first quarter of this year, Nvidia met headwinds. They weren't specific to the company, but instead represented a generally difficult environment for growth stocks, particularly AI players. As tech giants poured billions of dollars into AI, investors began to worry that the revenue opportunity might fall short of expectations. And conflict in Iran, along with its impact on oil prices and the transport of goods through the region, added to uncertainties.

All of this weighed on AI stocks, including shares of AI chip giant Nvidia. But over the past few weeks, tensions lifted. Investors have felt more confident about a potential resolution of the conflict in Iran. And earnings reports and other comments from tech giants show that AI demand isn't wavering, suggesting the revenue opportunity remains solid. Against this backdrop, Nvidia just did something for the first time since October, and history shows us what's likely to happen next.

Image source: Getty Images.

Nvidia's path to AI dominance

Before we take a look at Nvidia's recent move, though, let's consider the AI giant's path so far. Nvidia wasn't always an AI superpower -- in its early days, the company's graphics processing units (GPUs) mainly fueled the exciting graphics in gaming. But the strength of these chips suggested that they could make their mark on many other industries -- so Nvidia created CUDA, a parallel computing platform that could take them there.

Then, about a decade ago, the company, recognizing the potential of AI, made its biggest and, as we now know, wisest move ever. It decided to design GPUs specifically for AI. And as the saying goes, the rest is history. Nvidia's GPUs proved to be ideal for AI, and since the company entered this market early, essentially creating the market opportunity, it progressively built an empire.

In recent times, Nvidia's commitment to constant innovation has kept it ahead of rivals. While competitors have multiplied, Nvidia still sells the top-performing GPUs, and AI is a field of such game-changing potential that customers are seeking out the best tools for their platforms -- this means that even if they buy chips from various players, they still rely heavily on Nvidia.

Record earnings over time

All of this is evident in Nvidia's earnings growth, with revenue and net income climbing to record levels quarter after quarter.

NVDA Revenue (Annual) data by YCharts

As mentioned, though, earlier this year, investors stopped rushing into Nvidia stock. Amid general concern about the AI revenue opportunity, they worried that Nvidia was no longer a ticket to major gains.

Now, let's consider what Nvidia just did for the first time since October. The stock has moved progressively higher in recent weeks as evidence showed that the long-term AI story remains very promising. In fact, Nvidia closed at a record high for the first time in six months -- and market value reached a new milestone at more than $5 trillion. Last year, Nvidia became the first to reach $4 trillion in market cap, making it the world's biggest company.

What's next for Nvidia stock?

So, what does history say about what's next? We'll look at the past five years -- this offers us a relevant picture as it includes the early days of the AI boom. As we can see in the chart below, after every peak to a new record, Nvidia experienced a brief pullback, then went on to progress to new highs.

NVDA data by YCharts

The pullback after the October record high was an exception as it lasted longer -- but, as mentioned above, specific reasons weighed on appetite for AI stocks.

Our analysis of the past isn't over, however. A look at valuation shows us that every time Nvidia reached bargain levels -- such as the level we're seeing today -- the stock went on to deliver a lasting rally.

NVDA data by YCharts

Today, Nvidia stock trades at about 24x forward earnings estimates, near its cheapest in about a year (and an incredible price for such a market leader).

So, history says Nvidia, after reaching this fresh record, is likely to continue marching higher in the months to come. And here's the best news of all: Even if Nvidia stock doesn't follow this historical pattern, the stock -- thanks to the company's market position and commitment to innovation -- has what it takes to soar over the long term.

Adria Cimino 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.