Shares of this AI titan have gotten significantly cheaper, but its massive market cap remains the same.
With the stock up 25,000% over the past 10 years, it’s no wonder Nvidia (NVDA 3.52%) relies on stock splits to keep its equity price manageable for smaller investors who may not have access to fractional shares. The most recent of these took effect on June 7 and gave investors 10 Nvidia shares for every one they previously owned – pushing its share price to around $126 at the time of writing.
The stock split did nothing to change Nvidia’s $3 trillion market cap. that represents the value of all its shares together. Still, some market participants are hopeful that the lower share price could make Nvidia’s capital more liquid and help it maintain its explosive run. Let’s dig deeper to decide if this tech giant is still a buy.
What is Nvidia’s bull thesis?
whether generative artificial intelligence (AI) industry can to be compared to the California gold rush, Nvidia would be sold the picks and shovels that every miner needs to dig for gold. The company’s flagship graphics processing units (GPUs) are essential for running and training complex AI algorithms. And that has led to explosive growth and margins.
Nvidia’s Q1 revenue up 262% year after year to $26 billion, driven by sales of data center chips such as the H100. And net income rose 628% to $14.88 billion.
Considering this increased growth rate, Nvidia stock is still reasonably valued at one forward price-to-earnings Ratio (P/E) around 47. For comparison, rival chip maker Advanced Micro Devices it has the same forward P/E despite only 2% sales growth in the first quarter. That said, Nvidia stock may not be as cheap as it seems on the surface.
Nvidia is not as cheap as that SEEMS
Over the next few years, Nvidia will face incredibly challenging complications. After enjoying sales growth over the previous 12 months, it will be difficult for the company to continue to grow its revenue compared to last year’s extremely high numbers. And that may be a big reason why the stock’s forward valuation is so low relative to growth.
Demand can become another problem. While Nvidia’s spades face the AI industry, it shields it from competition on the consumer side of the industry, it will not be protected from an industry-wide slowdown, which could happen if its customers are unable to generate enough cash flow to justify their spending on Nvidia chips.
Image source: Getty Images.
AI’s long-term prospects look undeniably bright. But there may be many ups and downs before it reaches its full potential — just like others big technologies such as the Internet, electric vehicles or EVEN blockchain.
Buy carefully
For many retail investors, Nvidia’s stock split will be a powerful psychological incentive to buy the stock. At just $120 a share, the big company now looks relatively small. And those who were previously intimidated by the four-digit stock price may now be encouraged to finally pull the trigger and hit the buy button.
But while Nvidia certainly has a bright future as the AI industry develops, investors buying the stock now are late to the party. And that brings the risk of being left holding the bag if things go wrong.
Over the next few years, Nvidia will face more difficult complications, which could cause top- and bottom-line growth to slow, even if the AI industry remains strong. While the stock still looks capable of outperforming over the long term, investors should remain aware of the significant risks they are taking by buying a company that has already grown so far so quickly.
Historically, no stock has grown exponentially forever. And Nvidia will likely face a fix at some point. Be careful out there.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.