Chip designer Nvidia (NASDAQ: NVDA) seems virtually unstoppable at the moment.
The company crushed Wall Street expectations and management guidance in last week’s first-quarter report. A global appetite for artificial intelligence (AI) systems, and especially for semi-creative generative AI platforms, once again pushed Nvidia’s results through the ceiling.
As a result, the stock rose to new all-time highs. With a market cap of just $2.85 trillion Microsoft (NASDAQ: MSFT) And Apple (NASDAQ: AAPL) can claim a greater market value today.
Given Nvidia’s impressive performance and rich valuation, it’s only fair to ask whether the stock can rise even further from this lofty point. Is Nvidia still a great buy, or is it high time to lock in your Nvidia profits with a quick sale?
A bull case for Nvidia
The company has many things going for it. It would take a book to discuss all of Nvidia’s proven or potential growth catalysts, but let’s scratch the surface:
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Nvidia is making money hand over fist. Sales revenue rose 262% year over year in the first quarter, pushing adjusted profits up 461%. Free cash flow exploded 479% higher.
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The company’s manufacturing partners, led by Taiwanese semiconductor manufacturing (NYSE: TSM) And Samsung (OTC: SSNL.F), do not have unlimited production capacity. High demand for Nvidia’s current range of AI accelerator chips has led to a backlog of unfulfilled orders and product delivery wait times of approximately four months. That is less than the eleven months in the fall of 2023, partly due to export restrictions to China. Yet the equation between supply and demand remains highly unbalanced in favor of strong demand and limited supply.
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The generative AI rush is still in its infancy. Systems will become more powerful for many years to come, requiring a steady stream of increasingly capable chips. In other words, Nvidia’s pioneering AI revenue streams won’t dry up anytime soon.
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Not content with resting on its digital laurels, Nvidia is actively seeking new applications for its own chip architectures. Examples include the Nvidia Drive self-driving vehicle control system and the Project GROOT model for humanoid robotics. These initiatives are quite small so far, but could become a serious source of income over time.
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Of course, I have to mention the 10-to-1 stock split that Nvidia announced alongside its earnings report. The split will take effect on the morning of Monday, June 10, dropping share prices from approximately $1,000 to approximately $100 per share. It’s largely an accounting exercise that doesn’t add any real value to Nvidia’s stock, but it does give shareholders more fine-grained control over the stock. And it’s a strong vote of confidence in Nvidia’s future. The board of directors is essentially saying that stock prices will continue to rise, so let’s make them a bit more affordable now.
Why the stock should undergo a correction soon
Nvidia undeniably has a collection of shareholder-friendly balls in the air. However, it’s possible that enthusiastic investors have pushed the stock price too high.
I’m not saying that Nvidia stock has peaked and is in for a dramatic decline. Far from it. The aforementioned benefits should keep the stock afloat for a while. Follow the money flowing through the AI ​​market and you’ll see Nvidia parked firmly on the receiving end. Other chip suppliers are sure to steal a few contracts over time, but Nvidia is an early leader and it won’t be easy to shake the company from the AI ​​accelerator throne. There’s room for several big winners in this corner of Silicon Valley, and Nvidia should be one of them in the near future.
So I wouldn’t recommend selling your Nvidia shares today. That’s especially true if you have a small stake with one or two Nvidia shares, managed in a brokerage that hasn’t yet embraced fractional share trading. If you find yourself in that situation and want to reduce your exposure to Nvidia – by converting a bit of your paper profits into actual cash returns – you should wait a while and let the stock split take effect. Then you can sell 10% or 30% of your Nvidia shares instead of dumping the entire investment.
Final Verdict: Be Cautious: Nvidia is Priced for Perfection
That said, Nvidia’s high valuation ratios and sky-high stock chart make me nervous. The company has been performing with sharp perfection so far, but I don’t know how long that streak will last. The history of semiconductors is littered with industry titans running into unexpected problems, and what if Nvidia is next?
It’s a far cry from a market cap of $2.85 trillion. Nvidia stock trades at 35 times revenue and 71 times free cash flow, like a hungry little startup with triple-digit revenue growth rates. It’s just hard to maintain that pace from an already lofty starting point, not to mention the limited range of chip manufacturing services available.
So on a buy, sell or hold scale, I’d recommend holding onto most of your Nvidia shares for now – with an eye on buying more after a price correction. I’m certainly not adding to my own Nvidia holdings at this point.
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Anders Bylund has positions at Nvidia. The Motley Fool holds positions in and recommends Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is Nvidia Stock a Buy Now? was originally published by The Motley Fool
