Nvidia (NVDA +2.55%) has reached many milestones this year. The stock rose above $1,000 and roared past Microsoft to become the world's second most valuable company after Apple. This is all thanks to Nvidia's dominance in the high-growth area of artificial intelligence (AI), a market expected to expand from $200 billion today to more than $1 trillion by the end of the decade. Nvidia makes the fastest AI chips around, ones that power key AI tasks like the training and inferencing of models, as well as a full portfolio of AI products and services -- and demand for many of these offerings has surpassed supply.
All of this has made Nvidia one of the key companies powering today's economy and helped the stock soar 173% so far this year. And this has led the tech giant to its latest milestone. Nvidia is set to join the Dow Jones industrial Average this week, replacing Intel, a chipmaker that's struggled in recent years. Does this latest win mean it's time to buy Nvidia? Let's find out.
Image source: Getty Images.
Nvidia's growth over time
First, a quick look at the Nvidia story so far and where the company fits into the AI picture. Nvidia has grown over time, and this all started with the power of its graphics processing units (GPUs), chips with the ability to process multiple tasks at the same time. They initially served the video games market, but progressively made their way into other industries -- and the GPU's abilities really started to shine as the AI boom took off.
As mentioned, Nvidia expanded to offer AI customers a complete stack, making itself the "go to" company for anyone launching an AI project. Nvidia also has committed to updating its older products so they seamlessly integrate with newer ones, a strategy that means customers know that if they invest in Nvidia now the products purchased won't become obsolete, and the investment will continue to pay off.
This has helped Nvidia increase earnings in the triple digits quarter after quarter, bringing revenue in the most recent quarter to a record of $30 billion. That's more than annual revenue as recently as the 2023 fiscal year. At the same time, Nvidia's margins have widened to more than 70%, and the company predicts gross margin in the mid-70% range for the full year.
With these sorts of results, it's no surprise that the Dow Jones Industrial Average (DJIA) invited Nvidia to join. The DJIA, launched in the late 1800s, today includes 30 of the country's biggest companies across industries -- and the index often is viewed as a reflection of the entire stock market and general economy.
NASDAQ: NVDA
Key Data Points
Nvidia's stock split
Members are weighted according to their stock price, so it's clear Nvidia's 10-for-1 stock split earlier this year, lowering the per share price, improved its chances of entering the index. Otherwise, its high price may have given it too heavy of a weight in the index. The stock split didn't change the market value or anything fundamental about the company, but it brought the shares down to about $120 at the completion of the operation.
Nvidia will join the DJIA before the start of trading on Friday, Nov. 8.
Does this news make Nvidia a buy? It's true that entrance into an index could result in some new buyers -- funds that track the DJIA, for example, will have to buy shares of this new member so that they can continue to reflect the DJIA's performance. But I don't think that will have a huge impact on Nvidia's stock performance immediately following its entrance into the index.
And I wouldn't say Nvidia's invitation to join the DJIA, on its own, makes the stock a buy. What truly makes Nvidia a great investment right now is the company's explosive growth and wide margins -- and the high demand for its products and services that should keep that trend going. And that's why, even trading at 47 times forward earnings estimates, the stock looks reasonably priced.
Joining the DJIA is an acknowledgement of Nvidia's success so far, but what we really should look to is Nvidia's earnings picture and future prospects -- and they suggest this high-flying stock could continue to climb over the long run, making it an excellent buy today.
