2 Reasons to Buy Nvidia After the Stock Split (and 1 Reason to Sell)

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%.

Story continues

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.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $808,105!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of June 10, 2024

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Cisco Systems, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.

2 Reasons to Buy Nvidia After the Stock Split (and 1 Reason to Sell) was originally published by The Motley Fool