Over the past few years, investors recognized the potential of artificial intelligence (AI) stocks to supercharge their portfolios. There are many players to choose from, but one stock in particular emerged as a surefire winner, and that's Nvidia (NVDA 2.54%).
The company, as the AI chip leader, already was generating explosive earnings growth -- and set out a clear plan for lasting success. So it's no surprise that investors rushed to get in on this stock, driving it to a gain of nearly 700% over three years.
The path was rather smooth until the past few months, when concerns about the AI revenue story shook investor confidence, and the war in Iran added to the uncertainty. As a result, Nvidia and many other AI players slipped in the first few months of the year.
But the month of April has proven to be a turning point for this AI leader. Investors, reassured about the long-term AI story, returned to AI stocks, and a ceasefire in Iran offered hope that the turmoil there may soon be over. Against this backdrop, Nvidia reached a record high on Friday and then another on Monday. After such gains, is it too late to buy this hot AI stock? Let's find out.
Image source: Getty Images.
Nvidia's momentum is back
After a few months in the doldrums, Nvidia's momentum has returned. The stock not only hit two record highs on two consecutive trading days, but it also reached a valuation no other has ever reached: On Monday, the company closed with a market capitalization of more than $5.2 trillion.
This sets it well ahead of tech giants Apple and Microsoft, which each have held the title of world's largest company in recent years. And in recent days, Alphabet has actually emerged as Nvidia's biggest rival when it comes to market cap.
NVDA Market Cap data by YCharts
So, first, let's consider how Nvidia's rebound unfolded. As mentioned, investors went from piling into AI stocks over a number of years to avoiding them early this year. As the valuations of these players reached high levels and companies spent billions of dollars to ramp up AI infrastructure, investors became more and more concerned about the long-term story: What if tech giants overspend and then can't monetize all of that capacity? This would make current valuations clearly unsustainable.
Meanwhile, the general geopolitical situation pushed investors toward stocks seen as safer bets, such as pharmaceutical players -- people always need their treatments, ensuring a certain level of revenue stability for these companies.
The valuations of AI stocks
But as the U.S. and Iran moved toward negotiations and as AI companies offered solid proof of sustained demand, investors began to reconsider AI stocks. And due to the declines we saw earlier in the year, something key happened: Valuations also fell -- and many AI stocks offered investors interesting buying opportunities.
All of these elements supported the idea of returning to Nvidia stock, and that's exactly what many investors have done lately.
NASDAQ: NVDA
Key Data Points
Now, let's return to our question: After this major rally, is it too late to buy Nvidia stock? Before answering, it's important to consider the company's long-term growth prospects and today's valuation.
Nvidia dominates the AI chip market right now, but it faces increasing competition. This isn't only from well-known chip players like Advanced Micro Devices, but also up-and-coming names like Cerebras -- a company aiming to launch an IPO this year -- and even some of Nvidia's customers, such as Amazon. Amazon has developed its own line of chips, and they've proven to be so popular that the company even considers launching a chip unit.
The best AI chips around
It's important to note, though, that needs for compute are so high -- and may even grow as more companies decide to pursue AI -- that there is room for several players. It's also key to remember that Nvidia's chips are the most powerful and the company focuses on innovation. So there's reason to believe Nvidia may continue to offer the best chips around -- tech giants, who aim to succeed in AI, are very likely to rely on Nvidia for a great deal of their projects.
And Nvidia isn't just a chip specialist. The company has designed complete systems as well as platforms for specific industries such as healthcare, autonomous vehicles, and telecom. The company is thinking ahead, too, building tools to combine AI and quantum computing, for example.
All of this suggests that Nvidia's revenue opportunity remains extremely strong. This supports the idea of owning Nvidia stock for the long term, but here's what supports the idea of actually buying shares right now: Even after recent gains, Nvidia stock remains reasonably priced, at 25x forward earnings estimates -- down from more than 40x earlier this year. So I have some great news for investors: It's not too late to buy this hot AI stock, one that has what it takes to score many more AI wins over time.
