Wall Street Turbulence: How Resilient is Nvidia?

Nvidia (NASDAQ: NVDA), along with many other growth stocks, had a rough start to the year. Investors worried about the war in Iran and potential weakness in the U.S. economy, and this hurt their appetite for stocks that generally require booming markets to thrive.

And another element made the situation even worse for companies in the artificial intelligence (AI) industry, such as Nvidia. Questions circulated about whether the AI revenue opportunity really was as massive as initially thought, especially considering the level of spending in this area. And seeing the high valuations of many AI stocks, some investors decided to sell and shift into other industries.

So, after leading stock market gains in recent years, AI stocks in the first quarter of this year actually led declines. All of these elements created significant turbulence.

Though the S&P 500 has rebounded this month and has even reached a new high, and Nvidia too is on the rise, investors are still digesting the recent turmoil. And that means now is an excellent time to consider one question: How resilient is Nvidia's business? Let's find out.

Image source: Getty Images.

Nvidia's path to AI dominance

First, let's consider Nvidia's path to AI dominance and explosive earnings growth. The company, which has been around for more than 30 years, in its earlier days focused on developing graphics processing units (GPUs) for the video gaming industry. But as it became clear that GPUs could be game changers across a variety of areas, Nvidia created a parallel computing platform to expand their use. And when Nvidia chief Jensen Huang recognized the potential of GPUs in AI, he decided to go all in on that area -- about a decade ago, Huang focused on developing GPUs specifically for AI.

Nvidia entered the GPU for AI market first, and the company's commitment to innovation has kept it in the lead ever since. Today, video gaming represents only a small portion of revenue, while data center accounts for 91% -- so it's fair to say that Nvidia is extremely dependent on AI for growth. And that's why questions about potential AI spending contributed to the stock's weakness in recent times.

Now, let's consider whether this company, which is so heavily reliant on AI, is in fact resilient.

As mentioned, Nvidia's business right now revolves around the AI market. In the earliest days of the AI boom, this meant powering the training of AI models, but this has evolved to include much more. Today, these trained models still need compute to inference, or go through the actual thinking process to solve problems -- for this, they rely on GPUs.

Nvidia's products and services

And Nvidia also offers a wide range of supporting products and services -- like networking tools -- and innovations that assist in the next phases of AI -- such as Nvidia's NemoClaw, a platform to help customers safely deploy popular AI agent OpenClaw. Meanwhile, Nvidia has also created specialized platforms to serve the needs of specific industries, from drug discovery for healthcare companies to autonomous vehicle development in the automotive industry. All of this makes Nvidia a lot more than a chip company.

Still, some investors may worry about the risk of a slowdown in AI spending. Though this doesn't seem likely right now -- with big tech aiming to invest nearly $700 billion this year -- it is a possibility at some point. It's important to note that Nvidia is working to bring AI into all industries and give it a key and lasting role. So the company won't depend on just one burst in spending. For example, Nvidia last year announced a partnership with Nokia that will put AI at the heart of next-generation mobile networks and infrastructure. This should represent a lasting revenue stream for Nvidia as networks rely on its technology over time.

Nvidia's focus on innovation

So, even if the big AI scale-up eventually reaches an end, by that time, Nvidia's products and services will be implemented throughout a vast number of areas -- and this should keep revenue marching higher. And given the company's innovation track record, it's very likely that Nvidia won't sit still and may instead aim to pioneer new techniques and technologies down the road. For example, Nvidia last year launched a quantum computing research center, a move that could position the company for a win in that high-potential field as AI and quantum computing join forces.

Meanwhile, AI has become an immensely profitable business for Nvidia, which generates a gross margin of more than 70%, so the company has the cash to invest in research and development.

All of this shows us that, even if potential hiccups in the AI story arise, Nvidia is positioned to generate growth over the long term. That makes it a very resilient business, and an excellent stock to buy and hold.

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.