Nvidia (NASDAQ: NVDA) executed a 10-for-1 stock split after the market closed on June 7. The event lowered the trading price from about $1,200 to $120 per share, but that doesn’t change the underlying fundamentals. The chipmaker still has a market cap of about $3 trillion, but investors can now buy smaller portions of the original stock.
Therefore, Nvidia’s trading price has fallen, but the valuations are exactly the same. That doesn’t mean much for smaller retail investors, as most brokers already allow their clients to buy fractional shares of more expensive stocks.
The only major difference will be felt in the options market, where it will become cheaper to trade Nvidia because each contract is tied to 100 shares of the 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 the big stock split. Instead, you should focus on the top three reasons to buy Nvidia stock and remain optimistic about its long-term prospects.
1. The continued expansion of the AI market benefits Nvidia
Nvidia’s revenue growth leveled off in fiscal 2023 (which ended in January 2023) as sales of graphics processing units (GPUs) for PCs cooled in a post-pandemic market. But in fiscal 2024, revenue rose 126% as the rapid growth of the generative artificial intelligence (AI) market led to more companies buying their high-end data center GPUs to handle AI tasks.
That continued expansion, driven in large part by the popularity of OpenAI’s ChatGPT and other generative AI tools, caused market demand to exceed Nvidia’s supply of data center chips. As a result, revenue has more than tripled year over year over the past three quarters – and analysts expect it to rise 98% in the 2025 fiscal year.
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 grows. According to Markets and Markets, the global AI market could grow at a compound annual growth rate (CAGR) of 37% between 2023 and 2030, and Nvidia could be the easiest way to capitalize on that secular trend.
2. Nvidia’s gaming business is recovering
The growth of Nvidia’s data center business fully offset the slower growth of its gaming GPU business over the past year. However, the segment’s revenue rose steadily year over year through fiscal 2024 as the PC market stabilized.
During the first quarter conference call, CFO Colette Kress said market reception for the new GeForce RTX SUPER GPUs was “strong.” Kress also alluded to the convergence of the gaming and AI markets on PCs, noting that the GPUs were “perfect for gamers, makers (and) AI enthusiasts”, with “unparalleled performance for running generative AI applications on PCs.”
According to JPR, Nvidia controlled 88% of the discrete desktop GPU market in the first quarter of 2024. Its closest competitor, Advanced micro devicesowned the remaining 12%, while Intel barely making a dent in the market.
Nvidia’s near-monopolization of the gaming PC gaming market, which Grand View Research expects to grow at a CAGR of 13% between 2023 and 2030, should boost gaming GPU sales and complement the expansion of its data center business .
3. Nvidia stock is still fairly valued
From fiscal 2024 to fiscal 2027, analysts expect Nvidia’s revenue to grow at a CAGR of 44%, while earnings per share (EPS) will rise at a CAGR of 51%. Based on these bullish estimates, Nvidia still seems fairly valued at 48 times forward earnings. AMD trades at 49 times forward earnings, but is growing much slower.
So instead of wondering whether you should buy Nvidia after the 10-for-1 split, just realize that it’s not expensive relative to its long-term growth potential. It could face many competitive, macro and regulatory challenges in the coming years, but it is likely to remain a linchpin and bellwether for the AI market for the foreseeable future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends 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.
Forget the stock split – these are the three reasons to buy Nvidia’s stock now was originally published by The Motley Fool
