Regardless of its trading price, the AI chipmaker still has room to run.
Nvidia (NVDA -0.09%) executed a 10-for-1 stock split after the market close on June 7. The event reduced its trading price from about $1,200 to $120 a share, but that doesn’t change any of its underlying fundamentals. The chipmaker still has a market cap of about $3 trillion, but investors can now buy smaller slices of the original shares.
Therefore, Nvidia’s trading price has declined, but its valuations are exactly the same. That doesn’t mean too much for smaller retail investors since most brokerages already allow their customers to buy fractional shares of higher-priced stocks.
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The only major difference will be felt in the options market, where it will become cheaper to trade Nvidia because each contract is tethered to 100 shares of its stock. It could also make it easier for Nvidia to pay its stock-based compensation.
So, unless you’re an options trader or Nvidia employee, you shouldn’t pay too much attention to its big stock split. Instead, you should focus on the three main reasons to buy Nvidia’s stock and stay bullish on its long-term prospects.
1. The secular expansion of the AI market benefits Nvidia
Nvidia’s revenue growth flatlined in fiscal 2023 (which ended in January 2023) as its sales of gaming graphics processing units (GPUs) for PCs cooled off in a post-pandemic market. But in fiscal 2024, its revenue surged 126% as the rapid growth of the generative artificial intelligence (AI) market drove more companies to buy its high-end data center GPUs to process AI tasks.
That secular expansion, largely driven by the popularity of OpenAI’s ChatGPT and other generative AI tools, caused the market’s demand to outstrip Nvidia’s supply of data center chips. As a result, over the past three quarters, its revenue more than tripled year over year — and analysts expect it to rise 98% in fiscal 2025.
Nvidia generated a whopping 87% of its revenue from its data center chips in the first quarter of fiscal 2025. That growth engine should continue to fire on all cylinders for the foreseeable future as the AI market expands. According to Markets and Markets, the global AI market could grow at a compound annual growth rate (CAGR) of 37% from 2023 to 2030, and Nvidia could be the easiest way to profit from that secular trend.
2. Nvidia’s gaming business is recovering
The growth of Nvidia’s data center business completely offset the slower growth of its gaming GPU business over the past year. However, the segment’s revenue steadily rose year over year throughout fiscal 2024 as the PC market stabilized.
During the first quarter conference call, CFO Colette Kress said the market’s reception for its new GeForce RTX SUPER GPUs was “strong.” Kress also hinted at the convergence of the gaming and AI markets on PCs, noting that its GPUs were “perfect for gamers, creators, (and) AI enthusiasts,” with “unmatched performance for running generative AI applications on PCs.”
Nvidia controlled 88% of the discrete desktop GPU market in the first quarter of 2024, according to JPR. Its closest competitor, Advanced Micro Devices, held the remaining 12%, while Intel barely dented the market.
Nvidia’s near-monopolization of the gaming PC gaming market, which Grand View Research expects to grow at a CAGRÂ of 13% from 2023 to 2030, should drive its gaming GPU sales higher and complement the expansion of its data center business.
3. Nvidia’s stock is still reasonably valued
From fiscal 2024 to fiscal 2027, analysts expect Nvidia’s revenue to grow at a CAGR of 44% as its earnings per share (EPS) increases at a CAGR of 51%. Based on those bullish estimates, Nvidia still looks reasonably valued at 48 times forward earnings. AMD trades at 49 times forward earnings, but it’s growing at a much slower rate.
So, instead of wondering whether you should buy Nvidia after its 10-for-1 split, you should simply realize that it isn’t expensive relative to its long-term growth potential. It could face a lot of competitive, macro, and regulatory challenges over the next few years — but it will likely remain a linchpin and bellwether of the AI market for the foreseeable future.
Leo Sun 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 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.