Stock splits, though thrilling for retail investors denied fractional share purchases by their brokers, do not metamorphose a company’s market valuation – how the market appraises it against sales, earnings, etc. – or its market capitalization, the amalgamated value of all its shares. Today, Nvidia boasts a $3.2 trillion market cap, ranking third globally, just shy of the iPhone manufacturer.
Amidst this backdrop, the burning question igniting investor dialogue is whether Nvidia, flaunting a lofty market cap, remains a buy. Two compelling reasons beckon investors to click ‘buy,’ while one cautionary flag advises considering an exit strategy.
Unveiling Reason No. 1: The AI Industry’s Nascent Stage
The AI domain is embryonic, awakening to possibilities conjured by ventures such as OpenAI’s ChatGPT, a generative AI chatbot reigning for just two years. Analysts envision the sector burgeon to a $1.3 trillion juggernaut by 2032. Amidst this landscape, Nvidia shines as the dominant producer of the potent GPUs vital for powering and nurturing these complex algorithms. Boasting an 80%+ market share, Nvidia surfs this wave of escalating demand deftly.
Despite looming threats from rivals like Advanced Micro Devices and Intel, Nvidia shields its turf with tailored tools like CUDA and a commitment to rolling out an updated slate of AI chips annually – a bullish stance ensuring competitors play catch-up.
The Second Reason to Dive In: A Sensible Valuation
Nvidia’s valuation stands sturdy despite a meteoric 3,000% ascension over five years. Sporting a modest forward P/E multiple of 48, Nvidia’s shares align closely with other AI hardware counterparts like AMD, whose modest 47 P/E accompanies meager 2% YoY growth, dwarfed by Nvidia’s 262% explosion.
Image source: Getty Images.
Flowing from this valuation lies the tantalizing prospect of Nvidia’s stock unfurling further as the AI sector blooms. Yet, tread cautiously, for a specter looms on the horizon, and it bears resemblance to a past parable.
The Grim Reminder: Nvidia’s Echo of Cisco Systems
Cisco Systems, a hardware colossus pivotal in the internet’s tapestry during the late ’90s, rode the dot-com wave to a dizzying $500 billion market cap zenith in 2000. The ensuing dot-com burst wrung the lifeblood from Cisco, slicing its valuation by a staggering 88% within two years, never reclaiming its former heights.
Somberly, Nvidia parallels Cisco’s yesteryears, serving a comparable role in today’s AI renaissance. Any hiccup in its growth momentum or pricing prowess could trigger a swift slash in valuation, akin to Cisco’s fate. While fervor envelops Nvidia investors, navigating such precipices demands cognizance of the lurking hazards, especially against the present valuation backdrop.
Deliberating the Nvidia Investment: A Critical Juncture
Prior to diving into the Nvidia stock pond, a poignant consideration beckons:
The Motley Fool Stock Advisor squad recently unveiled the ten choicest stocks they believe hold promise for investors… and Nvidia found no place on that list. The selected decuplet promises colossal returns in the near future.
Reflect on Nvidia’s April 15, 2005 ascension to this elite roster… envision investing $1,000 upon their nod; today, a princely $808,105 would nestle in your coffers!* The Stock Advisor’s prowess, quadrupling the S&P 500 return since 2002, shines resplendent, offering a guiding light for investors embarking on this odyssey.
*Stock Advisor returns as of June 10, 2024