Nobody wants to feel like they've missed the boat, but chasing a stock just because the price went up is a dangerous game that can end badly. It's so important to focus on fundamentals first and price second.
While artificial intelligence (AI) chip company Nvidia (NVDA 10.16%) has multiplied in value, rarified growth has driven those returns on the heels of an AI spending boom. Technology companies are snatching up Nvidia's chips as fast as they can.
So, how much of this is already priced into shares today? Is there room for new investors to buy the stock and still prosper?
Here is what you need to know.
Nvidia is confident in its market position
Wall Street has been buzzing about Nvidia's staggering leadership in the AI chip market, where estimates peg the company's share between 80% and 90%. The trick for investors now is determining whether Nvidia can keep that share. There's no doubt that Nvidia faces competition from rivals, including AMD and Intel, and some big tech companies will seek custom chips to reduce their dependence on Nvidia's hardware.
However, Nvidia seems ready to protect its market share. CEO Jensen Huang publicly stated in an interview his belief that Nvidia's chips are so good that competitors could give theirs away for free and it still wouldn't matter. That's a bold statement to make. Still, Huang added that GPU chips are a low portion of a data center's overall cost and that Nvidia's GPUs can be programmed to perform multiple algorithms well. In other words, Nvidia's chips provide so much value that switching wouldn't make sense, even at a lower cost.
It's not just the chip that makes the difference but the software used to get the most out of those chips. Nvidia's proprietary CUDA programming software has become equally dominant, and it gets harder to switch out components once everything starts getting programmed a specific way. Jensen Huang stated publicly that the programming flexibility of Nvidia's GPUs gives data centers the ability to serve a wide range of customers. In other words, different companies may have different AI applications, so the data centers must be able to run multiple models equally well.
The AI chip market is just getting started
Suppose Nvidia overestimates itself, and competitors start eating into its market share. What then?
Nvidia could make up for any business it loses on a growing AI chip market, which could be just getting started. Nvidia's total data center business was worth $47.5 billion in 2023. Assuming Nvidia's market share is as high as estimated, that's most of the current chip market.
Lisa Su of rival AMD believes the total AI chip market could grow to $400 billion by 2027, just a few years away. Another study from Newmark believes AI will drive a doubling of the U.S. data center footprint by 2030.
Even if Nvidia fumbles its market share all the way down to 25%, that would still mean its data center revenue could double between now and the next several years. The upside is much higher if Nvidia maintains more share than that.
Shares offer upside for new long-term investors
Considering that upside, the stock seems reasonably priced despite its remarkable rally over the past few years. Analysts expect earnings per share of $24 this year, pricing the stock at 37 times earnings. Analysts also believe earnings will grow by an average of 35% annually over the next three to five years.
Again, that seems realistic, considering the upside in data center revenues. If anything, Nvidia's surging cash flows could entice management to repurchase vast amounts of stock to help further boost earnings growth. Nvidia is in a tremendous financial spot right now.
NVDA PE Ratio (Forward) data by YCharts
Nvidia's price-to-earnings ratio is a bargain if the company delivers earnings growth up to analysts' estimates. Heck, Nvidia could fall short, delivering around 20% earnings growth, and the stock is still arguably cheap today.
Is Nvidia a buy?
That doesn't guarantee investment returns, but the odds seem pretty good that Nvidia can and will create shareholder value over the coming years based on today's prices. Remember that stocks can be volatile and that Nvidia could easily go up or down in the short term. Consider buying shares slowly so that you don't get caught up in a poorly timed purchase, and embrace the long-term mindset of someone partnering with a business, looking for performance years from now -- not months or quarters.
