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Thursday, June 13, 2024
Thursday June 13, 2024
Thursday June 13, 2024

Is it too late to buy Nvidia stock as demand for AI chips surges?

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Nvidia’s market cap hits $2.6 trillion amidst soaring demand for AI chips, but is it still a good investment?

Nvidia has once again proven why it stands as a leading semiconductor stock. Last week, the chipmaker delivered its fiscal 2025 first-quarter report, showcasing triple-digit percentage revenue growth and insatiable demand for its most powerful chips. This performance has driven Nvidia’s market cap to an astonishing $2.6 trillion, marking a 230% rise over the past year. Given such rapid growth, investors are left wondering whether it’s too late to buy into this remarkable success story.

In fiscal 2022, Nvidia’s primary revenue source was gaming. However, the company had long been developing GPUs for both gaming and data centres. The advent of artificial intelligence (AI) and deep learning technologies allowed Nvidia to enhance the speed and capabilities of its processors, establishing itself as a pioneer in AI innovation.

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The public debut of ChatGPT ignited a surge in demand for generative AI, revealing that 10,000 of Nvidia’s top GPUs powered the model. This revelation sparked unprecedented demand for Nvidia’s AI-capable chips, cementing its dominance in the market. Despite competitors like AMD launching the MI300 line to rival Nvidia’s H100 and upcoming H200 GPUs, customers have largely stayed loyal to Nvidia, recognizing its continuous innovation.

Nvidia’s latest platform, Blackwell, promises to run trillion-parameter large language models at just 4% of the cost and energy consumption of its previous Hopper platform. The company claims even greater cost savings for other computationally intensive applications, demonstrating its commitment to maintaining leadership in the AI chip industry. With a market share exceeding 80%, Nvidia’s position appears secure for the foreseeable future.

Financially, Nvidia’s first-quarter report for fiscal 2025 underscores its market leadership. The company reported a 262% year-over-year revenue increase, reaching $26 billion. Almost $23 billion of this came from the data center segment, which saw a 427% revenue rise. This marks a significant shift for a company that, until two years ago, derived most of its income from the gaming market.

During this period, Nvidia’s operating expenses increased by only 39%, leading to a net income of $15 billion, a 628% increase from the previous year. These results propelled Nvidia’s stock price past $1,000 per share, prompting a 10-for-1 stock split effective June 7. The last stock split occurred in July 2021, when Nvidia executed a 4-for-1 split.

Despite the stock’s impressive gains, Nvidia’s valuation might not be as inflated as some think. While its P/E ratio of 87 is not cheap, the company’s profit growth rate, which remains well within triple-digit percentages, may justify this valuation. Its forward P/E ratio of 38 suggests a strong value proposition, indicating that Nvidia’s stock might still have room to grow.

The sustained high demand for Nvidia’s AI-capable chips and its solid financial performance suggest that it is likely not too late to invest in Nvidia. The company has experienced unprecedented growth, and given that demand for its AI chips far outstrips supply, it should continue to see rapid revenue and profit growth, potentially driving the stock higher in the coming years.

Before investing in Nvidia, consider other top stock picks. The Motley Fool Stock Advisor’s latest list of the best stocks to buy now did not include Nvidia, suggesting that while Nvidia remains a strong investment, there may be other opportunities with higher potential returns. However, Nvidia’s impressive track record and continued innovation in AI technology make it a compelling choice for investors seeking long-term growth.

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