What a transformation a year can bring. From enduring a 33% decline in 2022 to boasting a 43% surge in 2023, the Nasdaq Composite has made a remarkable turnaround, hinting at potential future gains. A historical analysis reveals that in the wake of a bear-market rebound, the tech-heavy index tends to continue rallying, with an average gain of 19% in the subsequent years. While no investment is without risks, this pattern suggests the ongoing recovery may have further room to run.

Investors often look for companies that have undergone stock splits in the hopes of identifying winning stocks. One such company is Nvidia (NASDAQ: NVDA), which recorded total returns of 12,780% over the last decade, culminating in a 4-for-1 stock split in mid-2021.

The chipmaker’s staggering 239% gains last year have raised concerns about its valuation. However, a closer examination reveals that the stock may be cheaper than it appears by certain measures.

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Nvidia’s Leveraging on AI Advancements

Recent breakthroughs in artificial intelligence (AI) have provided a significant boost to Nvidia. Particularly, the widespread adoption of generative AI has led to its application in various tasks, enhancing productivity. Nvidia’s GPUs, renowned for their ability to support AI systems and render lifelike images in video games, have found their way into cloud computing and data centers, positioning the company to leverage the growing AI and machine learning market.

Estimates suggest that the generative AI market is expected to soar from $40 billion in 2022 to $1.3 trillion by 2032, marking a 42% compound annual growth rate (CAGR), according to a report by Bloomberg Intelligence.

Performance Echoes AI Potential

Nvidia’s fiscal 2024 third-quarter results underscore the potential unleashed by AI. The company achieved a record revenue of $18.1 billion, marking a 206% year-over-year increase, while its diluted earnings per share (EPS) skyrocketed by 1,274% to $3.71. Although these percentages were partly influenced by favorable comparisons due to the tech sector slowdown in 2022, they demonstrate the immense opportunity at hand.

While it’s improbable for Nvidia to sustain triple- or quadruple-digit growth over the long term, its continued expansion is expected to be robust. The company’s fourth quarter is forecasted to yield further record results, with revenue projected at $20 billion at the midpoint of its guidance range, signifying a 230% year-over-year growth, portraying the enduring potential of the AI landscape.

Nvidia also dominates the market for chips used in machine learning, capturing an estimated 95% market share, positioning itself favorably to capitalize on the upward trajectory of AI.

Diverse Growth Drivers

Besides AI, Nvidia has multiple other growth engines in its arsenal. The gaming market’s turnaround is anticipated, with the global gaming GPU market predicted to expand from $3.65 billion in 2024 to $15.7 billion by 2029, boasting a 34% CAGR. As the leading provider of gaming GPUs, Nvidia is set to benefit from this secular tailwind.

Additionally, with around 95% control of the market for processors facilitating data transmission in data centers and cloud computing, Nvidia stands to gain from the continuous digital transformation. The data center market is poised to grow from $263 billion in 2022 to $603 billion by 2030, representing a CAGR of approximately 11%, ensuring sustainable growth for Nvidia in this segment as well.

These factors underscore that Nvidia’s chips are not just the go-to standard for AI but also play pivotal roles in the gaming, cloud computing, and data center spheres.

Reassessing Valuation through a Different Lens

Following Nvidia’s more than 200% surge in 2023, investors are understandably wary of its valuation. However, the stock’s current multiple of 27 times sales and 65 times earnings, while seemingly lofty, does not account for its triple-digit growth rate. Given the company’s rapid expansion, the price/earnings-to-growth (PEG) ratio represents a more appropriate metric, indicating Nvidia’s undervaluation with a ratio of less than 1.

Investors eyeing Nvidia Corporation have been on a roller-coaster ride, wagering on the company’s prowess while navigating the perils of an overpriced market. The stock, nestled within the illustrious S&P 500, comes dangling with a PEG ratio exceeding 2, painting a sobering portrait of Nvidia’s valuation amidst the larger market turmoil.

The Valuation Context

Nvidia, despite its buoyant position across diverse growth markets and a storied legacy of sturdy growth, finds itself tethered to a valuation that stretches one’s credulity. The PEG ratio, a touchstone for measuring a stock’s worth in relation to its earnings growth, has breached the 2 mark, sounding alarm bells for wary investors.

Unraveling the Stock-Split Cheer

While some proponents tout the merits of a prospective stock split as a clarion call for investors, counting on it as a harbinger of fortune ahead of a projected surge in the Nasdaq in 2024, the glaring question remains: Is Nvidia’s stock priced too high?

Decoding the Market Signals

Seated at the crux of this conundrum, the fundamental question hovers: is it wisdom or folly to infuse $1,000 into the purchase of Nvidia stock at the present crossroads?

Contrarian Sentiment

The Motley Fool, an outspoken purveyor of investment wisdom, has side-stepped Nvidia while unveiling the certified top 10 stocks for impressive returns in the offing. Nvidia, to the chagrin of advocates, failed to secure a spot in their coveted list, setting tongues wagging and raising apprehensions over the allure of this stock in the near future.

The Stock Advisor, a revered oracle in financial circles, extols a vital road map for investors to navigate the unpredictable terrain. However, their abstention from endorsing Nvidia adds to the dissonance surrounding the stock’s prospects.

As the market ebbs and flows, the question of whether Nvidia holds promise or peril lingers, casting a shadow of doubt over the gateway to astronomically high returns.

© 2023 Investors are on tenterhooks, grasping for the elusive beacon that will guide them through the enticing labyrinth of Nvidia’s stock.