Everyone seems to be in the business of calling the top for Nvidia's (NVDA 0.03%) stock price these days. And perhaps there's good reason for that. Despite the incredible returns Nvidia has delivered over the last couple of decades, the stock has also experienced some brutal sell-offs -- the most recent one, of course, beginning in late 2021 and ending about a year later.
Data by YCharts.
Indeed, even with less-than-ideal timing during the last peak of the Nvidia hype cycle during the pandemic, investors still would have beaten the market. But who wants to buy and then promptly suffer a 70% decline?
Thus, three months into 2024, with Nvidia up more than 80% year to date, the question has resurfaced once again: Is it still time to buy Nvidia right now, or is it time to sell?
Two massive markets at Nvidia's command
Nvidia's epic stock performance is thanks to booming artificial intelligence (AI) system sales. However, its rise into the ranks of the world's most valuable companies (the "Magnificent Seven") might seem totally bonkers. Nvidia's market cap currently stands at nearly $2.3 trillion. That's remarkably high, even considering that Wall Street analysts expect its revenue to increase by another 80% or more this year to $110 billion and foresee generally accepted accounting principles (GAAP) earnings per share nearly doubling to $23, giving it a forward price-to-earnings ratio of 36.
Clearly, investors are betting Nvidia will stay in high-growth mode for quite some time. How unreasonable is that expectation, considering that the company's semiconductor-based sales have been cyclical in the past? Perhaps high growth for at least a few years isn't so crazy.
CEO and co-founder Jensen Huang recently explained that his company is really at the forefront of two massive AI markets:
- The world's existing data center market, valued roughly at $1 trillion, is in dire need of upgrades using accelerated computing hardware (like Nvidia's GPU systems) to meet the demands of new high-end software (like AI).
- The new generative AI market needs purpose-built data centers to allow companies of all sorts to build customized AI systems using their proprietary data.
The existing and already-massive data center market tends to go through a full upgrade cycle about every four to five years. Hardware has a limited life span, and the steady pace of technological advancement requires old equipment to be replaced with higher-performance gear. Nvidia's GPU leadership makes it a natural fit to lead the way in the accelerated compute (AI) upgrade cycle.
But what of these new generative AI data centers, which Huang often calls "AI factories"? CEO Lisa Su of chip design rival AMD (AMD 1.78%) has said that total accelerated computing chip sales could reach $400 billion in 2027 alone. That's a lofty prediction, and one that includes not just generative AI factories but also upgrades to the existing data center market. But the trend is clear; generative AI is well on its way to becoming an industry worth tens of billions of dollars in annual sales all on its own.
Nvidia's data center products have clearly been the standout victors in the space, headed toward $20 billion in quarterly revenue and beyond. Chip systems tend to be very sticky once they get installed into a data center. Intel (INTC -1.63%) is a case in point; its CPUs have dominated the data center market for decades (with an estimated market share of over 70%), even though companies like AMD have been offering compelling alternatives. Thus, this data center accelerated computing phenomenon could provide a natural path for Nvidia to earn itself lots of recurring (though still cyclical) hardware sales in the decades ahead.
Chart source: Nvidia.
How to handle Nvidia stock right now
As good as Nvidia's story is, at some point investors should brace for a big slowdown in accelerated computing growth or even a temporary contraction. That's just the way these things go.
However, the timing of that cyclical slowdown is anyone's guess. All indicators point toward another banner year ahead for Nvidia in calendar 2024. Huang (and even some key suppliers for the GPU data center systems) have hinted that things are already looking pretty good for 2025. But it's simply too soon to say.
For investors who don't own Nvidia stock or those who feel like they don't own enough, history suggests patience will serve you well. For younger investors who have many years before they plan on drawing on their portfolios, rather than placing big sweeping bets on Nvidia at this point, consider firing up a small dollar-cost averaging (DCA) plan. If you do that, strap in and prepare to keep those regularly scheduled stock purchases going -- especially if Nvidia stock suffers a big decline.
For investors who already own ample amounts of Nvidia stock, and especially those who may not have so much time before they plan on using their money (perhaps for retirement), utilizing a reverse DCA approach in which they periodically sell small amounts of stock could help lock in some of their profits.
As spring gets rolling, though, Nvidia still appears to have a head of steam. As that continues, expect the investor frenzy to further heat up. But come what may, be resolute and keep a level head.
