If You Had Invested $5,000 in Nvidia Stock at Its IPO, Here's How Much You'd Have Now

Chipmaker Nvidia (NVDA 1.64%) has struggled this year. High inflation suppressed consumer demand for gaming chips in the second quarter, causing its revenue and gross profit margin to fall far short of guidance. More recently, worrisome news regarding its China business has given investors another reason to sell, and shares currently trade 63% off their all-time high.

That said, Nvidia has still been an incredible investment over the long term. Since its initial public offering (IPO) on Jan. 22, 1999, the stock has soared more than 29,700%. That means an initial investment of $5,000 would now be worth more than $1.4 million.

Is this growth stock still a buy?

Shaping the future of graphics and artificial intelligence

In 1999, Nvidia's invention of the graphics processing unit (GPU) brought revolutionary visual effects to video games and films, and that spark started its meteoric rise through the ranks of the semiconductor industry. Nvidia GPUs -- chips designed to quickly perform complex math -- have since seen widespread adoption in data centers, where they accelerate workloads like data science and artificial intelligence (AI).

Today, Nvidia holds more than 90% market share in workstation graphics and supercomputer accelerators, and Forrester Research recently said Nvidia GPUs have become synonymous with AI infrastructure. Indeed, the company has consistently delivered record-breaking results at the MLPerf benchmarks, a series of objective tests that measure the performance of AI hardware and software.

Nvidia has also extended its portfolio beyond hardware into subscription software and developer tools. For instance, AI Enterprise is a suite of software that helps businesses build and deploy AI applications across a range of end markets, including retail, healthcare, cybersecurity, and manufacturing.

Similarly, its Omniverse platform allows creators to collaborate on 3D design projects -- such as building virtual worlds for the metaverse -- and it allows engineers to run simulations that generate synthetic data for training the AI models that power autonomous robots and self-driving cars.

That broad portfolio has strengthened Nvidia's data center business, and it has led to solid financial results over the long term, despite a disappointing performance in the most recent quarter.

Data source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate. Note: fiscal Q2 2023 ended July 31, 2022.

Looking ahead, management puts its addressable market at $1 trillion, and Nvidia's capacity for innovation should keep it on the cutting edge of graphics and AI.

For instance, the company is set to debut its first central processing unit (CPU) in the first half of 2023, making its data center portfolio more comprehensive. Similarly, H100 data center GPUs built on the new Hopper architecture are now in full production, with an initial launch slated for this October. Hopper offers an order-of-magnitude performance increase compared to data center chips built on its previous Ampere architecture.

Lastly, Nvidia recently announced its next-generation Ada Lovelace GPU architecture for gaming and graphics chips, bringing up to fourfold-better performance to consumer use cases.

Geopolitical risk in China

In late August, Nvidia informed investors that the U.S. government had imposed new license requirements for exports to China and Russia. The restrictions apply to its A100 and H100 data center chips, and any future semiconductors that meet or exceed the performance of its A100 chips. The U.S. government hopes those requirements will prevent Nvidia's fastest chips from being used in military applications in China and Russia.

At the time, Nvidia said its third-quarter guidance included $400 million in potential sales to China that could be impacted if the U.S. government does not grant licenses in a timely manner. That figure accounts for roughly 7% of its sales forecast for the third quarter, though China accounted for 26% of revenue in fiscal 2022 (ended Jan. 30, 2022).

Investors should watch this situation closely. Nvidia is undoubtedly subject to geopolitical risk due to its business in China. That said, CEO Jensen Huang recently provided some upbeat insight into the situation, noting that the vast majority of Chinese customers would not be affected.

Pricey valuation

Nvidia is currently the second-most-valuable semiconductor company in the world, behind Taiwan Semiconductor, and it trades at a pricey 40.1 times earnings, a sizable premium compared to many of its peers. However, that looks cheap compared to its five-year average of 57.6 times earnings, and management believes its gross profit margins will improve as software becomes a larger part of total sales. That means Nvidia's bottom line could grow more quickly than its top line, bringing its price-to-earnings ratio down in a hurry.

More broadly, Nvidia is a high-quality business that is shaping the future of AI, virtual reality, and other trendy technologies. For that reason, investors interested in owning this stock will probably have to pay a premium regardless of when they decide to buy. With that in mind, I think investors should consider buying a few shares of this growth stock today, though the odds of 29,700% returns over the next two decades are virtually nonexistent.