Stocks splits have no direct impact on a business aside from reducing its share price, but they can still be a useful indicator for investors. Stock splits are only necessary following substantial and lasting share price appreciation, which itself tends to correlate with strong financial results.

Several companies that have split their stocks recently have also outperformed the broader S&P 500 (^GSPC 0.32%) over the last five years, including:

  • Apple (AAPL 2.48%): 4-for-1 split in August 2020 
  • Nvidia (NVDA 0.03%): 4-for-1 split July 2021 
  • Tesla (TSLA 15.31%): 3-for-1 split in August 2022 

Wall Street sees Nvidia as the best buy of the bunch. Apple's median 12-month price target of $202 per share implies 15% upside from its current price, and Tesla's median 12-month price target of $275.10 per share implies just 3% upside. But Nvidia's median 12-month price target of $622.50 per share implies 39% upside from its current price.

Here's what investors should know about this artificial intelligence stock.

Nvidia is the gold standard in AI infrastructure

The Nvidia brand is synonymous with accelerated computing. Its invention of the graphics processing unit (GPU) in 1999 initially brought cutting-edge visuals to the PC gaming market, but its chips have since become integral to data center infrastructure because they offer the throughput required by complex workloads like artificial intelligence (AI) and graphics applications.

Nvidia systems are the gold standard in both cases. The company holds more than 90% market share in supercomputer accelerators and workstation graphics. It also holds 95% market share in machine learning processors, and its compute platforms have consistently achieved top results at the MLPerf benchmarks, standardized tests that compare the performance of AI products from different vendors.

In 2019, Nvidia extended its data center footprint by branching into high-performance networking with its acquisition of Mellanox. Nvidia has since supercharged the acquired intellectual property with its own chips, and that portion of its business has grown sevenfold in the last three years. Investors can expect that momentum to continue. Nvidia's InfiniBand networking platform is tailormade for AI.

More recently, Nvidia has taken additional steps to cement its AI leadership by branching into subscription software and cloud services. For instance, DGX Cloud allows businesses to provision supercomputing infrastructure, software, and frameworks needed to build AI applications across a range of disciplines, from recommender systems in retail to autonomous robots in manufacturing.

Nvidia is also leaning into generative AI with NeMo and Picasso, cloud services that provide access to pretrained models that can be customized with company-specific data. NeMo supports language-based generative AI applications and Picasso supports image- and video-based generative AI applications. Both are available through DGX Cloud.

Nvidia is growing like wildfire amid strong demand for AI products

Nvidia reported phenomenal financial results in the second quarter. Revenue soared 101% to $13.5 billion on record data center sales, and non-GAAP earnings skyrocketed 429% to $2.70 per diluted share. CFO Colette Kress attributed the strong results to "tremendous demand for Nvidia accelerated computing and AI platforms" and CEO Jensen Huang mentioned generative AI specifically.

Management expects those tailwinds to intensify in the near term. Third-quarter guidance implies a sequential acceleration in revenue growth to 170%, and it calls for an 18-percentage-point expansion in gross profit margin that points to even faster earnings growth.

Yet Nvidia has hardly dented what management says is a $1 trillion opportunity across enterprise software, data center infrastructure, automotive computing, and gaming graphics. So the company is well positioned to maintain its momentum into the future.

Nvidia stock looks expensive

Nvidia is a wonderful business with a durable competitive advantage and strong growth prospects, but investors should carefully consider valuation. The stock currently trades at 34.1 times sales, a premium to its three-year average of 22.9 times sales. That metric is not as unreasonable as its recent high of 45.8 times sales, but it is still quite pricey.

Wall Street may see 39% upside in the next 12 months, but there is no guarantee those returns will materialize. With that in mind, investors that buy Nvidia stock today should be prepared for volatility in the future -- and, more importantly, they should start with a very small position.