Stock splits can be attractive to retail investors, particularly those whose brokerage firms do not offer them the ability to purchase fractional shares. I’ve lost count of the number of non-financial people who suddenly ask me about Nvidia (NASDAQ:NVDA) stock now that it’s trading at “only” $130 per share.
But while splits can make a stock appear cheaper, they have no impact on a company’s valuations (how the market values ​​it relative to sales, earnings, etc.) or its market capitalization, which is the value of all its outstanding shares. combined. In Nvidia’s case, that market capitalization stands at $3.2 trillion, making it the third-largest company in the world today, just behind the one that makes iPhones.
Is Nvidia stock still a buy at its current high market cap? Here are two reasons to keep hitting the buy button and one reason to consider jumping ship.
#1 Reason to Buy: The AI ​​Industry is Just Getting Started
It’s only been about two years since OpenAI took the world by storm with ChatGPT, a generative artificial intelligence Chatbot (AI) capable of producing high-quality responses to user queries based on training data. Analysts are feverishly optimistic about the potential of the AI ​​industry, with Bloomberg Intelligence estimating that it could be worth $1.3 trillion by 2032.
If this prediction turns out to be anywhere near accurate, it will be an incredible opportunity for Nvidia, which is the leading manufacturer of specific types of powerful graphics processing units (GPUs) needed to run and train these advanced algorithms. Currently, it has a market share of more than 80% in this popular niche, where demand exceeds supply.
While Nvidia will face increasing competition from rival chipmakers such as Advanced microsystems (NASDAQ:AMD) And Intel, it protects its market share through software solutions such as CUDA (Compute Unified Device Architecture), a computing platform and programming interface specifically designed for use with its hardware, and by constantly improving its offerings. According to CEO Jensen Huang, the company will now release a new family of AI chips updated every year (instead of its previous pace of once every two years), making it even more difficult for competitors to keep up. pace.
Reason #2 to Buy: Nvidia Is Not Overvalued Compared to Fundamentals
The second bullish fact regarding Nvidia is its valuation. Despite rising more than 3,000% over the past five years, shares remain reasonably priced relative to the company’s remarkable growth rate.
With a front multiple price/earnings (P/E) At just 48, Nvidia’s shares aren’t much more expensive than other popular AI hardware stocks like AMD, which has a P/E of 47. To put that in context, in the first quarter, sales of ‘AMD only grew 2% year over year. , while Nvidia’s exploded by 262%.
This valuation suggests that Nvidia stock could have more room to run if the AI ​​industry lives up to analysts’ expectations. But don’t move: there is a significant risk factor that new investors should be aware of.
A reason to sell: its uncanny resemblance to Cisco Systems
Cisco Systems (NASDAQ:CSCO) is a hardware company that sold the routers and switches needed for the Internet’s development in the late 1990s. It was the way investors bet on what the smart money saw as a transformative new industry. And at the height of the dotcom bubble in 2000, Cisco’s market capitalization had reached $500 billion. Then the bubble burst and it fell 88% in two years. The stock has still not regained its previous highs.
Investors should view this as a cautionary tale, as 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 of its valuation, just like what happened to Cisco. While Nvidia investors have plenty of reasons to be excited, 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?
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions 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 Mad Motley has a disclosure policy.
2 Reasons to Buy Nvidia After the Stock Split (& 1 Reason to Sell) was originally published by The Motley Fool
