If you've been an investor in the stock market for at least one year, you've probably come across the phrase "sell in May and go away." That adage was coined after market watchers came to recognize that the six-month period between May and October generally tends to deliver weaker returns than the period from November to April.
There are many theories as to why, but seasonality might play a role. Wall Street bankers and fund managers take time off in the warmer spring and summer months just like everybody else, so there's often less trading activity during that period.
According to the Corporate Finance Institute, the benchmark S&P 500 index has gained an average of 2% in the May-to-October period each year dating back to 1945, compared to an average return of 6.7% from November to April. That's quite a difference.
So with May right around the corner, should you start selling your stocks?
No. It's always best to take a long-term approach to investing by assessing the market over periods of at least five to 10 years. For that reason, seasonally weak periods shouldn't be viewed as triggers to offload your portfolio. With that in mind, here's one red-hot stock you might want to buy this May instead.
Image source: Getty Images.
Nvidia is leading the most exciting industry in the world right now
Nvidia (NVDA 3.71%) is currently riding what is possibly the most valuable boom in technology-sector history: artificial intelligence (AI). It produces the most advanced chips in the world specifically designed for developing and powering AI applications, and one analyst from global banking giant HSBC thinks the company will have a 90% market share in its current fiscal year.
Nvidia's graphics processing units (GPUs) are responsible for training AI-powered online chatbot ChatGPT, which has taken the tech world by storm. OpenAI, the developer of ChatGPT, used at least 10,000 Nvidia GPUs to train the large language model, and an estimate by TrendForce suggests it will need more than 30,000 to accelerate its progress.
Similarly, Tesla (TSLA 4.96%) CEO Elon Musk just announced plans to set up his own company to rival OpenAI, and he has already engaged Nvidia for the necessary hardware. This announcement came shortly after he publicly advocated for a global pause on advanced AI development.
But start-ups aren't the only companies in need of major computing power. Late last year, Microsoft (MSFT -2.45%) and Nvidia teamed up to build what will be one of the world's most powerful AI supercomputers. In 2023, they took that relationship to the next level. The Microsoft Azure cloud platform will host Nvidia's DGX supercomputer online, meaning millions of businesses will have the processing power to develop advanced AI applications right at their fingertips -- no expensive hardware required.
The AI opportunity is quickly escalating into the trillions of dollars
The opportunities for software companies like OpenAI could be unprecedented. Ark Investment Management, run by well-known tech investor Cathie Wood, thinks they could be swimming in a $14 trillion revenue pool by 2030, which would create $90 trillion in enterprise value and add a whopping $200 trillion to the global economy.
If Nvidia maintains a market share of 90% in the chips needed to train AI models, it could wind up with virtually unrestricted pricing power, because those companies that need them would have nowhere else to go.
But Nvidia isn't just a chipmaker. It has been developing its own AI software applications in-house, one of the most intriguing of which is its Drive platform. That's a combined hardware and software solution for car manufacturers wanting to give their new vehicles fully autonomous capabilities.
The self-driving car business promises to be an incredibly lucrative segment. Nvidia has already built up a sales pipeline worth at least $11 billion, and 35 of the world's top automotive brands have engaged the company's services so far. Emerging industries like autonomous ride-hailing, for example, might be worth as much as $14 trillion within the current decade (according to Ark Invest). The arms race is clearly on in that area, too, and Nvidia will likely be a go-to technology provider for most car manufacturers except Tesla, which has developed its own platform.
Why Nvidia stock is a buy in May
The HSBC analyst I mentioned earlier just upgraded Nvidia stock to a buy rating, and more than doubled his price target from $175 previously to $355. The stock is considered expensive right now based on traditional metrics, with a forward price-to-earnings ratio of 61, based on $4.53 in projected earnings per share in its fiscal 2024 (which is already underway) and its current stock price of $273.94 as of this writing.
That's more than double the forward price-to-earnings ratio of the tech-focused Nasdaq-100 index, which stands at 26.
But the growth opportunities in AI could be larger than anything we've seen in the past, and that's why investors are willing to pay such a premium for Nvidia stock. For those with investment horizons of five years or more, the stock might be an incredible buy here, especially ahead of its fiscal 2024 first-quarter results, which are due to be released on May 24.
