Nvidia (NASDAQ: NVDA) shares performed excellently in both the short and long term. The artificial intelligence (AI) chip leader held its initial public offering (IPO) in January 1999, six years after the company was founded. In honor of Nvidia stock’s 25th anniversary earlier this year, below are 25 reasons – in no particular order – to buy it.
As a background, Nvidia has four market platforms: data center, gaming, professional visualization and automotive & robotics. Data centers are the largest (accounting for 87% of revenue in the most recent quarter) and growing the fastest thanks to the increasing adoption of AI, especially generative AI. Generative AI exploded onto the scene in late 2022 with the release of the ChatGPT chatbot.
1. Company is led by a founder
Nvidia CEO Jensen Huang was one of the company’s three co-founders. Research shows that stocks of founder-led companies tend to outperform others over the long term.
2. Founder-CEO pays close attention to the game
Huang owns about 868 million Nvidia shares after Friday’s 10-for-1 stock split (discussed in #6), according to the most recent data available. This stake is worth approximately $105 billion, as of the stock’s closing price on June 7. Given this enormous importance, investors can be assured that Huang’s interest is aligned with their interests.
3. The CFO’s huge stock holdings indicate a lot of confidence in Nvidia’s future
CFO Colette Kress owns 6.43 million shares of Nvidia following Friday’s 10-for-1 stock split (discussed in #6). These shares were worth approximately $777 million as of June 7. A CFO probably has the best insight of anyone in a company – including the CEO – about its financial performance at any given point in time. So it seems safe to say that Kress is very optimistic about Nvidia’s growth prospects.
4. The longer-term performance of Nvidia stock has been phenomenal
Over the past decade, Nvidia stock has returned 25,431% through June 7. That’s more than 100 times as much S&P500 index return of 230%. Put another way, a $1,000 investment in Nvidia stock ten years ago would be worth more than $250,000 today.
A stock’s past performance is no guarantee of its future performance. However, a share long-term performance often reflects the ability of a company’s top management to establish and implement successful strategies.
5. The AI market is expected to continue growing rapidly
By 2024, the global AI market is expected to reach $184 billion in revenue, and a compound annual growth rate (CAGR) of 28.5% until 2030, when the market will be worth an estimated $826.7 billion, according to Statista.
This is a huge positive for Nvidia, whose graphics processing unit (GPU) chips and related products and services are used to train and deploy AI applications.
6. Nvidia’s 10-for-1 stock split just happened on June 7
On Friday, June 7, Nvidia stock was split 10 to 1. Investors who owned the shares the day before received nine additional shares for every share they owned. The stock is expected to trade on a split-adjusted basis on Monday, June 10.
On Friday, the closing price of Nvidia stock was $1,208.88, meaning the split-adjusted price was $120.89.
Potential benefits for investors from the Nvidia stock split include a price increase due to increased demand for shares, and a greater chance of being listed on the stock exchange. Dow Jones Industrial Average Table of contents.
7. The company dominates the AI chip market for data centers
It is widely estimated that Nvidia has more than 90% of the data center AI GPU chip market, and more than 80% of the total data center AI chip market.
8. The market for AI chips in data centers is expected to continue growing like gangbusters
By 2023, the global market for chips to accelerate AI processing in data centers would be worth about $45 billion, according to an estimate by Advanced micro devices (NASDAQ: AMD) CEO Lisa Su. She predicts that this market will reach $400 billion in sales by 2027, representing a blistering CAGR of 72.7%.
9. Nvidia’s data center business has strong competitive advantages
Advanced Micro Devices (AMD) and Intel have recently entered Nvidia territory: GPUs that enable AI for data centers. Investors don’t have to worry too much. Nvidia’s competitive advantages come not only from its GPUs, but also from its software, especially CUDA, which has been used by millions of developers for many years. CUDA ensures its GPUs have the parallel processing capabilities needed to accelerate general-purpose and AI computing.
10. Revenues are growing rapidly
Nvidia’s year-over-year revenue growth over the past four quarters, starting with the most recent quarter: 262%, 265%, 206% and 101%.
11. Profits are rising even faster than revenues
Nvidia’s adjusted earnings per share (EPS) are growing faster than revenue, reflecting expanding profit margins. This dynamic is driven by the fact that the highly profitable data center activities are growing faster than the other activities. Here is the company’s adjusted earnings per share growth over the last four quarters, starting with the most recent quarter: 461%, 486%, 593%, and 429%.
12. Free cash flow is also growing rapidly
Nvidia’s annualized free cash flow (FCF) growth over the last four quarters, starting with the most recent quarter: 465%, 546%, N/A (FCF was negative in the year-ago period), and 634%.
13. Wall Street expects strong earnings growth over the next five years
As of June 7, Wall Street expects Nvidia to grow adjusted earnings per share at an average annual rate of 46.5% over the next five years.
14. Nvidia almost always exceeds Wall Street expectations
Nvidia almost always exceeds Wall Street’s quarterly profit expectations, and often by a wide margin. Over the previous four quarters, the company’s adjusted earnings per share have exceeded analysts’ consensus estimates by percentages ranging from 10% to 29%.
If this momentum continues, Nvidia’s CAGR over the next five years will be higher than the 46.5% that analysts now expect.
15. The valuation of the share is reasonable
At Friday’s closing price, Nvidia stock is worth 44.6 times expected earnings. In a vacuum, this is a high rating. But it’s reasonable for a company that Wall Street expects adjusted earnings per share to grow 109% this fiscal year, and at an average annual rate of 46.5% over the next five years. Furthermore, analysts are likely underestimating the growth potential, as described above.
16. It is much more profitable than its main competitors and peers
|
Company |
GAAP profit margin (TTM) |
|---|---|
|
Nvidia |
53.4% |
|
Advanced micro devices |
4.9% |
|
Intel |
7.4% |
|
Qualcomm |
23% |
|
Broadcom |
29.9% |
List is not all-inclusive. Data sources: YCharts and finviz.com. GAAP = generally accepted accounting principles. TTM= after 12 months.
17. The company is reportedly forming a custom chip business unit
Sources have reported and signs indicate that Nvidia is forming a custom chip business unit so it can take over some of the custom chip development work for big tech companies that currently goes to chip makers like Broadcom. The new unit will reportedly help companies design custom chips for AI and other applications.
18. It is the largest supplier of graphics cards for gaming
Gaming is Nvidia’s second-largest market platform, accounting for 10% of revenue in the most recent quarter. The company is the world’s largest supplier of graphics cards for computer gaming. It had an 88% share of the discrete desktop GPU market in the first quarter of 2024, according to Jon Peddie Research. AMD and Intel had a share of 12% and less than 1% respectively.
19. The PC gaming market is expected to continue its solid growth
The global PC gaming market generated approximately $80.3 billion in revenue in 2023, according to Statista, who predict it will be worth $141.9 billion by 2028. That equates to a CAGR of approximately 12.1%.
20. Nvidia generates some recurring revenue
Nvidia has relatively recently started launching software and service offerings that generate recurring revenue. In February, CFO Kress said the company’s software and services offerings reached annualized revenue of $1 billion in the fourth fiscal quarter.
21. Revenues should get a big boost if driverless vehicles become legal
Nvidia’s revenues should get a big boost if driverless vehicles become legal in the US and around the world. Hundreds of vehicle manufacturers, Tier 1 suppliers and others are developing on the company’s autonomous vehicle AI computing platform, DRIVE.
When Nvidia’s partners use the DRIVE platform in production vehicles, they will need to purchase a DRIVE AI computer for each vehicle. Major partners include luxury vehicle manufacturers Mercedes Benz and electric vehicle (EV) giant. BYD.
22. Its sovereign AI business has multi-billion dollar potential
Nations and other sovereign entities have relatively recently started using Nvidia’s technology to build their own sovereign AI cloud services. The “sovereign AI infrastructure market represents a multi-billion dollar opportunity in the coming years,” CFO Kress said last November on the company’s Q3 2024 earnings call.
23. It just ramped up its robotics initiatives
In March, Nvidia introduced the Project GR00T (Generalist Robot 00 Technology) AI base model for humanoid robots and major updates to its Isaac robotics platform.
24. The balance sheet is solid
At the end of the last quarter, Nvidia had cash and cash equivalents of $7.6 billion and long-term debt of $8.5 billion.
25. Employees like working for Nvidia
On Glassdoor.com, Nvidia employees and former employees give the company an overall rating of 4.6 stars (on a scale of 1 to 5) as of June 7. Employee satisfaction is especially important for companies in the technology world because there is a limited supply of top tech talent. Nvidia’s rating is the highest of all so-called Big Tech companies.
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Beth McKenna has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, BYD Company, Nvidia, and Qualcomm. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has a disclosure policy.
25 Reasons to Buy Nvidia Stock Now was originally published by The Motley Fool
