Nvidia (NVDA -0.14%) has become a Wall Street darling this year with its shares up 205% year to date. The company's longtime dominance in graphics processing units (GPUs) perfectly positioned it to profit substantially from a boom in artificial intelligence (AI). GPUs are crucial to developing AI models, so the chipmaker became the go-to supplier for most companies.
Its swift rise has many investors considering adding its stock to their portfolio. Nvidia recently delivered stellar quarterly results and will likely be a key player in AI for years. It could be a lucrative long-term buy.
But it's also worth asking how long it can sustain this growth and whether future year-over-year comparisons will hurt its share price. Here's why it's wise to exercise caution before loading up on the stock now.
A stock dip despite stellar quarterly results
Nvidia's bull run this year led many analysts to question whether the company could live up to the hype. But investors were proved right when the chipmaker posted its results for its 2024 second quarter last month.
The period saw revenue soar 101% year over year, topping $13 billion. Growth was mainly driven by increased demand for GPUs for AI applications, which led data center revenue to rise 171%.
More importantly, profits hit new heights, with operating income climbing over 1,200% to nearly $7 billion. And the company expects to report more significant growth in its current quarter as supply strains resolve quicker than expected.
Despite the glowing quarter, Nvidia's stock has actually dipped 6% since its earnings release. Excitement over AI seems to have peaked, strengthening the argument that much of its short-term growth is already priced into the shares. This would support the fact that its price-to-earnings (P/E) ratio currently sits at about 107, well above the preferred 20 or below, which would make it a bargain.
So it could be worth looking at alternative AI stocks, or hold Nvidia shares for the very long term to see a solid return on your investment.
Will Nvidia suffer from future comparisons to this year?
Nvidia's growth this year is in stark contrast to its performance amid macroeconomic headwinds in 2022. The stock plunged 50% over the 12 months after repeated declines in its PC-centered segments, with total revenue rising just 0.2% for the year. Operating income tumbled 58% to $4 billion last year.
So, while Nvidia is seeing massive jumps in earnings in 2023 thanks to AI, it is important to remember it is also benefiting from financial comparisons to one of its worst years. Therefore, the question remains whether it will be able to beat this year's earnings growth in 2024, especially as competition rises.
The company got a significant head start in AI thanks to its years of dominance in GPUs. But companies like Advanced Micro Devices, Amazon, and Intel all have chip expansions in the works to challenge it. For instance, AMD unveiled what it describes as its most powerful GPU ever this year, which will begin shipping in 2024. So Nvidia might not have it as easy next year as it does in 2023.
Therefore, if you're looking for a play in the booming AI market, it might be best to consider other options. For instance, Microsoft is an attractive AI stock with its 49% stake in OpenAI and solid positions in cloud computing and productivity software. Its P/E of 34 indicates it offers far more value than Nvidia's shares. Microsoft isn't exactly cheap, but it could have more potential over the next year and the long term.
Nvidia remains a key player in tech and AI, but its high stock price makes it too risky for now, with more reliable choices available.
