2 reasons to buy Nvidia after the stock split (and 1 reason to sell)

This tech giant is riding a tidal wave of AI-related demand. But is it too late for new investors to jump on the bandwagon?

| More on:
A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Stock splits can be exciting for retail investors, particularly those whose brokerages might not offer them the option of purchasing fractional shares. I have lost count of the number of non-finance people suddenly asking me about Nvidia (NASDAQ: NVDA) stock now that it's trading for "just" $130 a share.

But while splits can make a stock appear cheaper, they have no impact on a company's valuations -- how the market prices it relative to sales, earnings, etc. -- nor on its market cap, which is the value of all its outstanding shares combined. In the case of Nvidia, that market cap is $3.2 trillion, making it the third-largest company in the world today, just a hair behind the one that makes iPhones.

Is Nvidia stock still a buy at its current lofty market cap? Here are two reasons to continue hitting the buy button and one reason to consider jumping ship. 

Reason No. 1 to buy: The artificial intelligence industry is just getting started

It has only been around two years since OpenAI took the world by storm with ChatGPT, a generative artificial intelligence (AI) chatbot capable of producing high-quality responses to user queries based on training data. Analysts are feverishly optimistic about the AI industry's potential, with Bloomberg Intelligence estimating it could be worth $1.3 trillion by 2032.

If that forecast proves close to accurate, this will be an incredible opportunity for Nvidia, which is the leading maker of the specific types of powerful graphics processing units (GPUs) needed to run and train these advanced algorithms. Currently, it holds a market share of more than 80% in that hot niche, where demand is outstripping supply.

While Nvidia will face growing competition from rival chipmakers such as Advanced Micro Devices (NASDAQ: AMD) and Intel, it's protecting its market share via software solutions like CUDA (Compute Unified Device Architecture), a computing platform and programming interface that's bespoke for use with its hardware, and by constantly improving its offerings. According to CEO Jensen Huang, the company will henceforth release a new family of updated AI chips every single year (up from its prior pace of once every two years), making it even harder for rivals to keep up.

Reason No. 2 to buy: Nvidia isn't overvalued relative to fundamentals

The second bullish fact about Nvidia is its valuation. Despite rising by over 3,000% in the last five years, shares are still reasonably priced relative to the company's remarkable growth rate.

With a forward price-to-earnings (P/E) multiple of just 48, Nvidia's shares are not much more expensive than other popular AI hardware stocks like AMD, which has a P/E of 47. To put this in context, in the first quarter, AMD's sales grew by just 2% year over year, while Nvidia's exploded by 262%.

This valuation suggests Nvidia's stock could have more room to run if the AI industry lives up to analysts' expectations. But hold your horses -- there is one big risk factor new investors should be aware of.

A reason to sell: Its uncanny resemblance to Cisco Systems

Cisco Systems (NASDAQ: CSCO) is a computer hardware company that sold the routers and switches needed to build out the internet in the late 1990s. It was the "picks and shovels" way for investors to bet on what the smart money saw as a transformative new industry. And by the peak of the dot-com bubble in 2000, Cisco's market cap had hit $500 billion. Then the bubble burst, and it dropped by a staggering 88% within two years. The stock still hasn't recovered to its previous highs.

Investors should take this as a cautionary tale, because Nvidia occupies a similar role in the AI space today, and any hit to its growth rate or pricing power could lead to a rapid collapse in its valuation, just like what happened to Cisco. While Nvidia investors have a lot to be excited about, they should also be aware of the potential risks this company faces before buying the stock, especially at its current valuation. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Cisco Systems, and Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Intel and has recommended the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool Australia has recommended Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A little Asian girl is so excited by the bubbles coming out of her bubble machine.
International Stock News

Opinion: This Nvidia forecast all but confirms that the artificial intelligence (AI) bubble will burst sooner rather than later

Nvidia's gross margin guidance points to pricing pressures that may signal an end to the irrational exuberance surrounding artificial intelligence…

Read more »

Hands reaching high for a trophy with a sunset in the background.
International Stock News

Is it too late to buy Nvidia stock in the second half of 2024?

The company has suffered from a recent sell-off, but maintains massive long-term potential.

Read more »

A white EV car and an electric vehicle pump with green highlighted swirls representing ASX lithium shares
International Stock News

Why Tesla could be the best 'Magnificent Seven' stock to own in the second half of 2024

Tesla's stock has been rallying of late, and there could be more gains to come in the weeks and months…

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
International Stock News

The CEO of Nvidia just sold 700,000 shares of his company's stock. Here's what investors need to know

What could it mean?

Read more »

A man in a business suit peers through binoculars as two businesswomen stand beside him looking straight ahead at the camera.
International Stock News

Where will Nvidia stock be in 1 year?

You might be late to the party.

Read more »

asx share price boosted by us investment represented by hand waving US flag across winning athlete
International Stock News

Is it too late for ASX investors to start buying US shares?

Should ASX investors start taking the gains from US shares like Nvidia off the table?

Read more »

A US flag behind a graph, indicating investment in US shares
International Stock News

Which US shares are ASX investors buying in 2024?

The ASX's most popular US shares contain some familiar names...

Read more »

A man and a woman sit in front of a laptop looking fascinated and captivated.
International Stock News

Prediction: 2 US stocks that will be worth more than Nvidia 5 years from now

These US stocks have a shot at surpassing Nvidia over the next few years.

Read more »