Stock splits can stir excitement among retail investors, especially those unable to buy fractional shares through their brokerages. The recent split of Nvidia (NASDAQ: NVDA) has sparked newfound interest, with shares now trading around $130 each.
While splits may make a stock seem more affordable, they do not alter a company’s valuations or its market cap, currently pegged at $3.2 trillion for Nvidia, making it the world’s third-largest firm, nipping at the heels of the Apple empire.
Given Nvidia’s substantial market cap, is it still a wise investment? Delve into two compelling reasons to keep hitting the buy button and one factor to contemplate when considering selling.
Grounds to Invest: The Expanding Horizons of Artificial Intelligence
Barely two years have passed since OpenAI wowed the world with ChatGPT, a generative artificial intelligence chatbot, capable of generating top-tier responses based on training data. Analysts are abuzz with optimism regarding the AI industry’s potential, predicting a value of $1.3 trillion by 2032, as per Bloomberg Intelligence.
This projected boom presents a golden opportunity for Nvidia, the primary producer of specialized high-powered graphics processing units (GPUs) required for operating and training these cutting-edge algorithms. Currently wielding over 80% market share in this red-hot sector, Nvidia faces soaring demand outstripping supply.
While competition from rivals like Advanced Micro Devices (NASDAQ: AMD) and Intel may intensify, Nvidia shields its market share through tailor-made software solutions like CUDA (Compute Unified Device Architecture) and consistent product enhancements. CEO Jensen Huang’s pledge to launch an updated AI chip series annually, doubling its previous pace, underscores Nvidia’s commitment to outpace competitors.
Rationale for Investment: Nvidia’s Grounded Valuation
Another compelling case for Nvidia lies in its valuation. Despite witnessing a 3,000% surge in the last half-decade, shares remain reasonably priced relative to the company’s impressive growth trajectory.
Image source: Getty Images.
Boasting a modest forward price-to-earnings (P/E) multiple of 48, Nvidia’s shares aren’t significantly pricier than other popular AI hardware stocks like AMD, which stands at 47. For context, AMD’s sales ascended by a modest 2% year-over-year in the first quarter, while Nvidia’s surged by a colossal 262%.
This valuation hints that Nvidia’s stock might have room for further growth if the AI industry meets analysts’ rosy forecasts. Yet, exercise caution as one significant risk factor looms for potential investors.
Selling Point: Drawing Parallels with Cisco Systems
Cisco Systems (NASDAQ: CSCO), a computing hardware firm pivotal in erecting the late 1990s internet infrastructure, faced a similar scenario. By 2000’s dot-com bubble peak, Cisco’s market cap soared to $500 billion before plummeting by 88% over two years, failing to reclaim its former highs.
Nvidia’s parallel role in today’s AI landscape echoes Cisco’s predicament, symbolizing risks tied to growth rate setbacks or pricing fluctuations potentially triggering a rapid devaluation, akin to Cisco’s historic downturn. As Nvidia enthusiasts revel in the company’s prospects, they must acknowledge the accompanying risks, particularly at present valuations.
Realizing Nvidia’s Potential as an Investment
Before diving into Nvidia stock, mull over this:
The Motley Fool Stock Advisor’s analyst team recently pinpointed what they deem the 10 most promising stocks to purchase now, with Nvidia notably absent from the list. These selected stocks hold the potential for substantial returns in the foreseeable future.
Reflect on Nvidia’s past inclusion on this list in April 2005. Back then, investing $1,000 based on the recommendation could have yielded a remarkable $808,105!*
Stock Advisor offers investors a roadmap to success, furnishing portfolio building guidance, frequent analyst updates, and two fresh stock picks monthly. Since 2002, the Stock Advisor service has outperformed the S&P 500 by more than fourfold.*
View the 10 recommended stocks »
*Stock Advisor returns as of June 10, 2024
