What a difference a year makes. after Nasdaq Composite The index lost 33% of its value in 2022 — one of the worst market performances in more than a decade — and the index has almost returned to its former glory, closing the door in 2023 with a 43% gain.
History offers a hint about what might happen next year. Since it first began trading in 1972, each year following a bear market recovery, the tech-heavy index has continued to rise, rising 19% on average. While there are no investment guarantees, this suggests that the current recovery has more room to run.
One strategy investors use to find winning stocks is to look at companies that have conducted stock splits in recent years, as these moves have historically been preceded by years of strong gains. One of these companies is Nvidia (NVDA 2.29%). Over the past decade, the stock has generated total returns of 12,780%, leading to a 4-for-1 stock split in mid-2021.
The chipmaker posted gains of 239% last year, which has some investors concerned about its valuation. However, a little research will reveal evidence that the stock is cheaper than it may appear by some measures.
Image source: Getty Images.
Artificial Intelligence Catalyst
Recent advances in artificial intelligence (AI) have been a boon for Nvidia. More specifically, generative AI has exploded in popularity in the past year, and these algorithms have been applied to a wide range of mundane, time-consuming tasks, resulting in increased productivity. Greater efficiency generally leads to greater profits, and companies are striving to integrate AI models into their operations to capitalize on unexpected gains.
So why does this matter to Nvidia? In short, the company produces the gold standard for graphics processing units (GPUs), which can not only provide the computing power needed to deliver lifelike visuals in video games, but can also provide the computational power needed to support artificial intelligence systems. All of this is possible because of parallel processing, which takes computationally intensive tasks and breaks them down into smaller, more manageable chunks, allowing GPUs to perform many complex mathematical calculations simultaneously.
As a result, NVIDIA processors have been deployed in a wide range of applications, including cloud computing and data centers, which will serve as hubs for many AI systems.
The accelerated adoption of AI will play to Nvidia’s strengths, and while estimates vary widely, there is general agreement that the opportunity is amazing. According to a report by Bloomberg Intelligence, the generative AI market will grow from $40 billion in 2022 to $1.3 trillion by 2032, at a compound annual growth rate (CAGR) of 42%.
The proof is in the pudding
A quick look at Nvidia’s recent results helps illustrate the potential of AI. In the third quarter of fiscal 2024 (which ended October 29), Nvidia’s revenue increased 206% year over year to $18.1 billion — a record for the company — while diluted earnings per share (EPS) rose 1,274% to $3.71. These ratios are partly skewed by easy compounding resulting from the technology sector slowdown in 2022, but they help illustrate the scale of the opportunity.
Investors shouldn’t expect the company’s three- and four-figure gains to continue over the long term, but its continued growth should be solid nonetheless. For the fiscal fourth quarter, now underway, management expects more record results, including revenue of $20 billion at the midpoint of its guidance range, representing a 230% increase year over year. This shows that the opportunity for artificial intelligence has not ended yet.
There is more good news. Nvidia is the undisputed leader in the market for chips used for machine learning — an established branch of artificial intelligence — and controls an estimated 95% of the market, according to New Street Research.
As the default provider of AI processing solutions, Nvidia is well-positioned to ride these secular tailwinds upward.
The game is afoot
While the prospects for AI are interesting, Nvidia has several other growth engines up its sleeve. For example, the recent recession in the gaming market has begun to shift. The global gaming graphics card market is expected to grow from $3.65 billion in 2024 to $15.7 billion by 2029, at a compound annual growth rate of 34%, according to market research firm Mordor Intelligence. As the leading provider of gaming GPUs, these secular tailwinds will boost Nvidia as well.
Nvidia is also the leading provider of processors used to compress data over the air and around data centers, with an estimated 95% of that market, according to CFRA research analyst Angelo Zino. Digital transformation shows no signs of slowing down as companies shift more workloads and business systems to the cloud, so the data center boom is likely to continue. The data center market is expected to grow from $263 billion in 2022 to $603 billion by 2030, at a compound annual growth rate of about 11%, according to Prescient and Strategic Intelligence Market Research.
All of this shows that Nvidia’s chips are much more than just the gold standard for AI — their products are also the semiconductors of choice for the gaming, cloud computing, and data center markets.
Gorilla 800 lb GPUs
After Nvidia shares gained more than 200% in 2023, investors are naturally feeling uneasy about its valuation — but there’s a problem.
The stock is currently selling for 27 times sales and 65 times earnings — lofty metrics that seem to validate investors’ concerns. However, these measurements don’t take into account Nvidia’s triple-digit percentage growth rate. For a company expanding so quickly, the most appropriate metric to use is the price/earnings-to-growth (PEG) ratio, which for Nvidia is less than 1 — the standard for low-priced stocks. to Standard & Poor’s 500, The PEG ratio is more than 2, which puts Nvidia’s valuation in context.
Given its dominant position in many growth markets, its strong history of growth, and its reasonable valuation, Nvidia is one split stock that investors should buy ahead of the expected NASDAQ rally in 2024.