It is a tale of extraordinary financial valor as shares of Nvidia surged by an astonishing 25,000% in the past decade, a reality that has ushered in Nvidia (NASDAQ: NVDA). To cater to individual investors with limited access to fractional shares, Nvidia leveraged the power of stock splits like the recent 10-for-1 maneuver on June 7. This move saw shareholders receiving 10 shares for each they previously held, thus revising the stock price to approximately $126.
Despite the stock split, Nvidia’s colossal $3 trillion market cap remains unmoved, a testament to its total equity value. Prospective investors are hopeful that the reduced share price could enhance Nvidia’s liquidity, perpetuating its meteoric rise in the stock market. A closer analysis is needed to discern if this tech behemoth remains a lucrative investment option.
The Logic Behind Nvidia’s Growth Trajectory
In an analogy equating the AI industry to the California gold rush, Nvidia plays the role of the merchant providing the essential tools for miners to seek gold. The company’s cutting-edge graphics processing units (GPUs) are pivotal for operating and training intricate AI algorithms, fueling exponential growth and profitability.
Nvidia’s first-quarter revenue skyrocketed by 262% year over year to $26 billion, driven by robust sales of data center chips such as the H100. Net income surged by a remarkable 628% to $14.88 billion.
Considering this remarkable growth trajectory, Nvidia’s stock seems reasonably valued with a forward price-to-earnings (P/E) ratio hovering at around 47. By comparison, a contender like Advanced Micro Devices boasts a similar forward P/E despite posting only 2% sales growth in the first quarter. Nonetheless, Nvidia’s stock may not be as affordable as it initially appears.
Caveats to Consider with Nvidia’s Stock
In the upcoming years, Nvidia confronts formidable challenges with exceedingly high comparable figures. Following a prosperous sales period in the last 12 months, sustaining revenue growth vis-a-vis substantial prior-year numbers poses a substantial hurdle. This might explain why the stock’s forward valuation appears modest relative to its growth potential.
Another looming concern is demand. While Nvidia’s pivotal position in enabling the AI industry shields it from competition on the consumer front, potential industry-wide deceleration could materialize if clients lack the financial means to justify their expenditure on Nvidia’s chips.
Image source: Getty Images.
The long-term horizon for AI appears promising, albeit rife with vicissitudes, reminiscent of other major modern technologies like the internet, electric vehicles, or even blockchain.
Proceed with Cautious Optimism
The recent stock split by Nvidia could serve as a potent psychological stimulant for retail investors to dive into the stock market. At a humble $120 per share, the colossal company now carries an illusion of modesty. Those previously deterred by its four-digit stock price may feel incentivized to take the plunge and hit that buy button.
Nevertheless, despite Nvidia’s promising future amid AI advancements, latecomers face the risk of being behind the curve. This scenario heightens the likelihood of being caught on the wrong side should circumstances turn awry.
In the near future, Nvidia will navigate through more daunting business challenges, potentially slowing top and bottom-line growth, even if the AI sector maintains its robust streak. While the shares still demonstrate potential for long-term outperformance, investors must remain cognizant of the substantial risks associated with backing a company that has rapidly ascended to great heights.
Looking back historically, no stock perpetually experiences exponential growth. Nvidia could inevitably encounter a correction. Caution and diligence are paramount in such ventures. Exercise prudence in your decisions.
Is Investing $1,000 in Nvidia Currently Advisable?
Before delving into Nvidia’s stock, ponder on this:
The Motley Fool Stock Advisor analyst squad recently pinpointed what they consider the most potential.