What a difference a year makes. After Nasdaq Composite After losing 33% of its value in 2022 – one of the worst market performances in over a decade – the index has almost returned to its former glory and is closing the door on 2023 with a gain of 43%.
History gives a hint of what might lie ahead in the coming year. Since it first traded in 1972, the tech-heavy index has continued to rally after a bear market rebound, gaining an average of 19%. While there are no investment guarantees, this suggests that the current recovery still has more room to run.
One strategy investors use to find winning stocks is to look at companies that have completed stock splits in recent years, as these moves have been preceded by years of strong profits in the past. One such company is Nvidia (NVDA 2.29%). Over the last decade, the stock delivered a total return of 12,780%, which led to a 4-for-1 stock split in mid-2021.
The chipmaker posted a 239% gain last year, making some investors concerned about its valuation. However, if you do a little research, you'll find evidence that the stock is cheaper than it might seem by some measures.
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The AI catalyst
Recent advances in artificial intelligence (AI) have been a boon for Nvidia. More specifically, generative AI went viral last year, and these algorithms were applied to a variety of mundane, time-consuming tasks, resulting in increased productivity. Greater efficiency generally leads to higher profits, and companies are looking to integrate AI models into their operations to capitalize on the expected profits.
Why is this important to Nvidia? In short, the company makes the gold standard graphics processing unit (GPU) that can not only provide the processing power needed to render lifelike images in video games, but can also provide the processing power needed to support AI systems. This is all possible thanks to parallel processing, which takes computationally intensive tasks and breaks them down into smaller, more manageable chunks, allowing GPUs to perform a variety of complex mathematical calculations simultaneously.
As a result, Nvidia processors have been used in a variety of applications, including cloud computing and data centers, which will act as hubs for many AI systems.
The accelerated adoption of AI will play to Nvidia's strengths, and while estimates vary widely, the general consensus is that the opportunities are staggering. According to a report by Bloomberg Intelligence, the generative AI market will grow from $40 billion in 2022 to $1.3 trillion in 2032, a compound annual growth rate (CAGR) of 42%.
The proof is in the pudding
A quick look at Nvidia's recent results illustrates the potential of AI. In the third quarter of fiscal 2024 (ended October 29), Nvidia's revenue rose 206% year-over-year to $18.1 billion – a company record – while diluted earnings per share (EPS) rose 1,274% $3.71 rose. These percentages have been partially distorted by slight comparisons as a result of the tech sector's slowdown in 2022, but help illustrate the magnitude of the opportunity.
Investors shouldn't expect the company's triple- and quadruple-digit gains to continue over the long term, but continued growth should still be robust. For the current fourth fiscal quarter, management is forecasting further record results, including revenue of $20 billion at the midpoint of its guidance range, an increase of 230% year-over-year. This shows that the AI opportunity is far from exhausted.
There is more good news. Nvidia is the undisputed leader in chips for machine learning – an established branch of AI – and controls an estimated 95% of the market, according to New Street Research.
As a standard provider of processing solutions for AI, Nvidia is well positioned to further capitalize on these long-term tailwinds.
The game is in progress
While the prospects for AI are intriguing, Nvidia has several other growth drivers up its sleeve. For example, the recent slump in the gaming market is starting to change. According to market research firm Mordor Intelligence, the global gaming graphics card market is expected to grow from $3.65 billion in 2024 to $15.7 billion in 2029, a CAGR of 34%. As a leader in gaming GPUs, this secular tailwind will also boost Nvidia.
Nvidia is also the leading provider of processors that transmit data over the air and near data centers, according to CFRA Research analyst Angelo Zino. This market share is estimated at 95%. Digital transformation shows no signs of slowing as companies move more workloads and business systems to the cloud, meaning the data center boom is likely to continue. According to Prescient and Strategic Intelligence Market Research, the data center market is expected to grow from $263 billion in 2022 to $603 billion in 2030, a CAGR of approximately 11%.
This all shows that Nvidia's chips are much more than just the gold standard for AI – their products are also the semiconductors of choice for the gaming, cloud computing and data center markets.
The 800-pound gorilla of GPUs
After Nvidia stock posted a gain of more than 200% in 2023, investors are naturally concerned about valuation — but there's a catch.
The stock currently sells for 27 times sales and 65 times earnings – high metrics that seem to confirm investors' concerns. However, these measurements don't take into account Nvidia's triple-digit percentage growth rate. For a company expanding so quickly, the more appropriate metric is the price-to-earnings-growth (PEG) ratio, which for Nvidia is below 1 – the standard for an undervalued stock. For the S&P 500, The PEG ratio is more than 2, which once again puts Nvidia's valuation into the right context.
Given its dominance in numerous emerging markets, strong growth history, and reasonable valuation, Nvidia is a stock split stock that investors should buy ahead of an expected Nasdaq rise in 2024.