In the artificial intelligence (AI) investing world, almost everyone has taken a look at Nvidia (NVDA -0.16%) at least once. The stock has been on fire this year and is up around 200%. After this stellar performance, some investors may be speculating if Nvidia will split its stock. After all, Nvidia has gone through multiple stock splits and has done it at lower price points.
So, with this potential catalyst in mind, should investors consider buying Nvidia shares? Let's take a look.
Nvidia is at the heart of the AI revolution
Why are stock splits such a big deal? After all, they are cosmetic. Essentially, it boils down to more investors being able to access the stock at brokerages without fractional shares available. While this is common in U.S. brokerages, it's less common elsewhere. Because Nvidia is one of the largest companies in the world (currently the sixth-largest with a market cap of $1.1 trillion), it has a significant global following.
Additionally, another stock split may unlock more value because Nvidia is one of the premiere AI investments. The company last split its stock in 2021 at around $800 per share, but it had previously split its stock in 2006 and 2007 when it was around $50 to $60 per share. So, investors shouldn't necessarily rule out this decision. The CEO of Nvidia, Jensen Huang, has been at the helm since he founded the company in 1993.
But why is Nvidia such a compelling AI investment? Its primary product, graphic processing units (GPUs), are the backbone of AI computing. GPUs are perfect for AI computing, as they must process a lot of data in a short amount of time. Additionally, GPUs can be hooked up to each other to create a more powerful system. Because clients want to build these supercomputers to power their AI models, Nvidia has seen a massive boost in sales because its GPUs are best in class.
This played out in its most recent quarter, with Nvidia's sales rising 101% year over year to $13.5 billion. Additionally, it expects revenue of $16 billion in Q3, indicating 170% growth. It's rare to see companies nearly triple their revenue in a quarter, but it's unheard of for a company Nvidia's size to do it.
The market isn't blind to Nvidia's success -- it has placed a premium price tag on the stock. But just how expensive is it?
Analysts have high expectations for Nvidia
It's easy to look at Nvidia's trailing price-to-earnings ratio (P/E) of 105 and write the stock off as overvalued. But that's missing the point entirely. Because Nvidia is going through a massive business transformation, it's better to review forward-looking estimates to understand what kind of growth is baked into the stock price.
NVDA PE Ratio data by YCharts
Forward ratios utilize analyst projections, which aren't perfect. But they at least give us a starting point to understand what analysts expect over the next 12 months. From these figures, we can deduce that analysts expect 66% revenue and 162% earnings growth over the next 12 months.
Those are lofty goals to hit, but with Nvidia posting 101% revenue and 854% earnings growth in Q2, I'd say these goals are attainable.
But there is a looming question: What happens after the boom? This is my primary concern with Nvidia, as it's unknown how many AI data centers need to be built and how often they'll be upgraded. Nvidia is a known cyclical company, and if demand for its GPUs falls off a cliff, its stock price will follow suit. This trend may last one year, or it could last for five.
I would therefore caution investors that they must stay vigilant with Nvidia stock. However, I don't think that's a reason to avoid Nvidia altogether. While I wouldn't make it a significant position in my portfolio, I think it's OK to devote a small segment (say 1%) to Nividia, just in case this GPU boom lasts for multiple years. If it does, you'll be rewarded. But if it doesn't, then you'll avoid catastrophic losses.
