Euphoria surrounding the possibilities of artificial intelligence (AI) technology is pushing the stock market to record levels. While there are many companies shaping the AI narrative, I would argue that Nvidia (NVDA 0.03%) is cast in the lead role.
The company's breakthroughs in compute networking are impacting a multitude of AI applications, including machine learning, generative AI, and large language models (LLMs). Nvidia is currently the nucleus of most systems powering modern AI tools, and investors have been cheering on the stock. Over the last year, shares have surged by 265%.
With Nvidia stock hovering in the vicinity of the all-time high it set earlier this month, some investors may be wondering if they've missed out on the chance to profit. My stance? Given all the moves Nvidia is making and the ways it's setting itself up for long-term growth, now is as lucrative a time as ever to scoop up some shares.
A meteoric rise
The chart below illustrates Nvidia's quarterly revenues, gross profits, and free cash flows over the last decade.
NVDA Revenue (Quarterly) data by YCharts.
Not only are sales skyrocketing, but Nvidia's commanding position in the graphics processing unit (GPU) and data center business has provided the company with unparalleled pricing power. This has helped it expand its margins materially -- improvements that flow directly to the bottom line.
In 2023, Nvidia increased its free cash flow sixfold. Unsurprisingly, this level of growth has brought Nvidia onto the radar of more investors. Ultimately, this has resulted in more buying activity -- leading to an eye-popping addition of $1 trillion to Nvidia's market cap in less than two months.
Image source: Getty Images.
Nvidia has loads of cash, and it's not afraid to spend it
Powered by its record performance in 2023, Nvidia has doubled the cash position on its balance sheet to $26 billion. While this is impressive, what I find more encouraging is how Nvidia is allocating its capital.
The company is showing a keen interest in AI software applications. Namely, the company has investments in voice-recognition company SoundHound AI as well as data analytics start-up Databricks.
Though it primarily develops hardware, Nvidia is quietly making inroads into enterprise software. Its software services business reached an annual revenue run rate of $1 billion last year -- a great milestone, but still much smaller than its $47 billion compute networking business.
Nvidia also joined Microsoft, OpenAI, Intel, and Jeff Bezos in a recent funding round for a start-up called Figure AI, which is developing humanoid robots that it plans to commercialize in manufacturing, warehousing, and even retail settings.
Nvidia stands to benefit from this relationship in several ways. Specifically, it is uniquely positioned to help further the development of Figure AI's bots from both a hardware and software standpoint.
The stock is expensive, but worth the premium
In the wake of the surge in Nvidia's stock, the company's valuation multiples have become a bit extended. Shares trade at 77 times trailing-12-month earnings. Moreover, Nvidia's forward price-to-earnings (P/E) ratio of 37 is nearly double that of the S&P 500.
Despite its ultra-premium valuation, I see Nvidia's stock as a solid opportunity for long-term investors. At a macro level, heavy secular tailwinds fuel AI budgets, and I don't expect those to abate anytime soon.
Based on Nvidia's ability to market itself as both a hardware and software solution, as well as the potential of its savvy investments, I see its journey as just starting. Using dollar-cost averaging to gradually build a position in the stock would be a prudent strategy, helping to mitigate risk while providing you with exposure to the long-term upside of Nvidia and the AI realm.
