Chip designer Nvidia (NVDA +4.30%) looks virtually unstoppable right about now.
The company crushed Wall Street's expectations and management's guidance targets in last week's first-quarter report. A global thirst for artificial intelligence (AI) systems, and particularly for semi-creative generative AI platforms, drove Nvidia's results through the ceiling again.
As a result, the stock soared to fresh all-time highs. With a market capitalization of $2.85 trillion, only Microsoft (MSFT +2.13%) and Apple (AAPL 0.85%) can claim a larger market value nowadays.
Given Nvidia's impressive performance and rich valuation, it's only fair to ask whether the stock can soar any higher from this lofty point. Is Nvidia still a great buy, or is it high time to lock in your Nvidia gains with a quick sell?
A bull case for Nvidia
The company has many things going for it. Covering all of Nvidia's proven or potential growth catalysts would take a book, but let's scratch the surface:
- Nvidia is making money hand over fist. Top-line revenue jumped 262% year over year in the first quarter, driving adjusted earnings 461% higher. Free cash flow exploded 479% higher.
- The company's manufacturing partners, led by Taiwan Semiconductor Manufacturing (TSM +5.08%) and Samsung (SSNL.F +115.99%), don't have unlimited production capacities. Heavy demand for Nvidia's current lineup of AI accelerator chips has created a backlog of unfilled orders and product delivery wait times of roughly four months. That's down from 11 months in the fall of 2023, partly thanks to export restrictions into China. Still, the supply and-demand equation remains heavily unbalanced in favor of strong demand and limited supply.
- The generative AI rush is still in its early days. Systems will grow more powerful for many years, requiring a steady flow of increasingly capable number-crunching chips. In other words, Nvidia's game-changing AI revenue streams won't run dry anytime soon.
- Not content to rest on its digital laurels, Nvidia is actively seeking new applications for its proprietary chip architectures. Examples include the Nvidia Drive self-driving vehicle control system and the Project GROOT model for humanoid robotics. These initiatives are fairly small so far but may become serious revenue streams over time.
- Of course, I have to mention the 10-to-1 stock split Nvidia announced alongside its earnings report. The split will take effect on the morning of Monday, June 10, moving share prices down from approximately $1,000 to roughly $100 per share. It's largely an accounting exercise that doesn't add any real value to Nvidia's stock, but it does give shareholders more fine-grained control over the stock. And it's a robust vote of confidence in Nvidia's future -- the board of directors is essentially saying that share prices will continue to rise, so let's make them a bit more affordable right now.
Why the stock may be due for a correction soon
Nvidia has an undeniable collection of shareholder-friendly balls in the air. However, enthusiastic investors may have lifted the stock price too high.
I'm not saying that Nvidia's stock has peaked and is due for a dramatic plunge. Far from it. The upsides listed earlier should keep the stock afloat for quite a while. Follow the money flowing through the AI market, and you'll find Nvidia firmly parked at the receiving end. Other chip suppliers will surely steal a few contracts over time, but Nvidia is an early leader, and it won't be easy to shake the company off the AI accelerator throne. There's room for several big winners in this corner of Silicon Valley, and Nvidia should be one of them for the foreseeable future.
So I wouldn't recommend selling your Nvidia shares today. That's especially true if you have a small stake with one or two Nvidia shares, managed in a stock brokerage that hasn't embraced fractional share trades yet. If you're in that situation and want to reduce your Nvidia exposure -- converting a bit of your paper profits into actual cash returns -- you should wait a while and let the stock split take effect. Then, you'll be able to sell 10% or 30% of your Nvidia holdings instead of dumping the entire investment.
NASDAQ: NVDA
Key Data Points
Final verdict: Be careful -- Nvidia is priced for perfection
That being said, Nvidia's lofty valuation ratios and skyrocketing stock chart are making me nervous. The company is executing with crisp perfection so far, but I don't know how long that streak will last. The history of semiconductors is littered with industry titans running into unexpected issues, and what if Nvidia is next?
It's a long way down from a $2.85 trillion market cap. Nvidia shares trade at 35 times sales and 71 times free cash flow, like a hungry little upstart with triple-digit percentage rates of revenue growth. It's just hard to keep up that pace from an already lofty starting point, not to mention the limited supply of chip manufacturing services.
So on a scale of buy, sell, or hold, I'd recommend simply holding on to most of your Nvidia shares for now -- with an eye toward buying more after a price correction. I'm certainly not adding to my own Nvidia holdings right now.
