In 2023, Nvidia (NVDA -1.99%) has had one of its best years in business since its founding over three decades ago. The company's business exploded after the launch of OpenAI's ChatGPT reignited interest in artificial intelligence (AI) and sent demand for graphics processing units (GPUs) soaring.
Nvidia's dominance in GPUs gave it a head start in AI, beating competitors such as Advanced Micro Devices and Intel to the market and allowing Nvidia to become the primary chip supplier to numerous companies. As a result, the chipmaker's earnings have soared, with its stock up 211% year to date.
There are plenty of reasons to be bullish about Nvidia. The company likely has a crucial role to play in AI over the long term and is profiting from recovering sectors like PCs and gaming. However, prospective investors should be aware of the positives and potential negatives of its business before filling up on its stock.
So, here are two reasons to buy Nvidia stock and one reason to sell.
Reason to buy: Profiting from the $137 billion AI market
According to Grand View Research, the AI market is valued at $137 billion and is projected to expand at a compound annual growth rate of 37% through 2030. Advances in the technology have the potential to boost countless industries, from cloud computing to consumer products, healthcare, education, autonomous vehicles, and more. Meanwhile, high-powered chips are crucial to run and develop AI models.
So, as numerous tech firms have pivoted to developing the sector this year, GPU demand has skyrocketed. The rise in sales has been most prevalent in Nvidia's earnings, delivering quarter after quarter of stellar results. In the company's third quarter of 2024 (ended October 2023), revenue increased by 206% year over year, with operating income climbing 1,600%.
The monster growth came alongside a 279% rise in data center revenue, which massively benefited from increased AI chip sales.
Heading into the new year, the tech market's hyperfocus on AI looks unlikely to dissipate. Nvidia has claimed a lucrative role at the top of the AI chip sector, which could prove challenging for competing chipmakers to overcome.
Reason to buy: A recovering gaming business
Macroeconomic headwinds in 2022 led to steep reductions in consumer spending across tech, with Nvidia hit particularly hard. The company posted repeated sales declines in its gaming segment throughout the year as spikes in inflation caused shoppers to pull back on console and PC component purchases.
The tech giant has multiple footholds in gaming, supplying its chips to Nintendo's Switch console and selling desktop GPUs to gamers worldwide who use the chips for custom-built gaming PCs.
Despite the setbacks, the market appears to be trending upward again. In Q3 2024, Nvidia's gaming segment posted revenue growth of 81% year over year and 15% sequentially. The company attributed the rise to strong demand for its GPUs in the back-to-school period and the start of the holiday season.
A return to growth in gaming means Nvidia is heading into 2024 on a much stronger footing than it started this year with a booming AI business and solid position in video games.
A reason to sell or at least wait
Data by YCharts.
The chart above shows Nvidia's price-to-earnings ratio and price-to-free cash flow have plummeted over the last six months, suggesting its stock is at one of its cheapest positions since June. That could signal another reason to buy. However, it also represents a tumbling stock that might not be finished falling.
Despite stellar earnings in its latest quarter, Nvidia shares have dipped around 9% since posting its Q3 2024 results. The company's meteoric stock rise in the first half of the year made it significantly overvalued compared to its earnings, with investors seemingly unwilling to buy until it can match its current valuation.
Multiple impressive quarters of growth brought back some value in Nvidia's stock, but it remains more expensive than alternative ways to invest in AI and tech in general.
Data by YCharts.
This table compares Nvidia's P/E and price-to-free cash flow to two other tech giants with promising positions in AI: Alphabet and Microsoft. These companies' significantly lower metrics make them a bargain compared to Nvidia, with Alphabet a particularly attractive alternative.
So, it might be worth holding off on Nvidia for now and prioritizing cheaper options for investing in AI and tech.
