Although it's only been a few weeks into the new year, 2024 has gotten off to a hot start. Optimistic sentiment surrounding the macroeconomy, coupled with surging demand in areas such as artificial intelligence (AI), has helped push the market to new highs.
In particular, the "Magnificent Seven" stocks have all played a role in pushing the S&P 500 higher during the past year. As the index continues to climb, one stock in particular seems to be moving in tandem.
Semiconductor manufacturer Nvidia (NVDA -3.89%) is already up more than 20% year to date. With both Nvidia stock and the S&P 500 hovering around all-time highs, investors may be wondering if it's too late to get in on the action.
Let's explore the dynamics of the capital markets and assess whether scooping up shares of Nvidia stock makes sense right now.
Employ a buy-and-hold mindset
One of the most tempting things to do when investing is to sell a stock. Whether one of your positions rockets higher or drops off a cliff, it's easy for emotions to take over and convince yourself that moving on is the optimal strategy. While this can be the case at times, it's paramount to ask yourself "why" when you're considering selling.
With this in mind, investors might wonder whether buying shares in Nvidia makes sense right now. After all, the company clearly has a fair amount of momentum pushing it higher.
Although market returns vary from year to year, the long-term performance of the S&P 500 makes one thing in particular very clear: Holding over the course of several years (even decades) has helped many people build generational wealth. The underlying thesis here is that the market tends to showcase its resiliency over a long-term time horizon.
This dynamic underscores the old investing adage that spending time in the market is far more important than timing the market. Warren Buffett has even said: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
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Is Nvidia stock attractive right now?
When assessing Nvidia stock, it is important to first understand why the stock is enjoying such pronounced buying activity.
Demand for Nvidia's semiconductor chips is off the charts. The company's chips are used to train generative AI models -- and the market for AI chips is expected to double in just the next three years.
While the company's revenue and profits are soaring, Nvidia stock has risen well over 200% in just the past year. In fact, the company is now the sixth most valuable company in the world by market cap. Given its surging stock price and $1.5 trillion valuation, it might appear that Nvidia is expensive and buying now could be a hasty move.
NVDA Revenue (Quarterly) data by YCharts
Indeed, Nvidia's revenue, operating profit, and free cash flow are all increasing at an unprecedented pace. Although some investors may be wary of these growth rates, both the company's projections and Wall Street analysts' estimates call for further acceleration. So while the image of a valuation of more than $1 trillion might make a stock appear expensive, there is an argument to be made that Nvidia is actually cheap.
As of the time of this article, Nvidia stock trades at a forward price-to-earnings (P/E) multiple of 31. In comparison, the company's biggest rival, Advanced Micro Devices, trades at a forward P/E of 48. While the prospects of AMD's MI300X accelerators look encouraging, the company still trails Nvidia's overall position in the graphics processing unit (GPU) market by a considerable margin. Moreover, AMD's revenue and profitability profile are nowhere near Nvidia's right now.
So even though the stock is hovering around its highs, valuation analysis suggests that now could be a unique opportunity to scoop up shares at a discount relative to the competition. Furthermore, long-term themes in the overall market support holding Nvidia stock for several years.
It's important for investors to understand that the AI market is still unfolding. But I see Nvidia as well-positioned to benefit from the trends fueling artificial intelligence for years to come. I think now is a great opportunity to begin building a long-term position by employing a dollar-cost averaging strategy.
