Is it Time to Buy the NVIDIA Stock Split?

NVIDIA (NASDAQ:NVDA) has been one of the best-performing stocks of the past several years. After the company’s Q1 earnings report, shares continued their upward march and broke the $1,000 barrier. Now trading at more than $1,140 per share, NVIDIA has surged more than 130% this year.

At the same time, the company announced a stock split that will take place on June 7th. So what does Nvidia’s 10 to 1 stock split mean? For every share that investors own prior to Nvidia’s stock split, they will own ten shares following the split.

The valuation of the company does not change but the number of shares outstanding increases by 10x and so the share price will be 90% lower to account for the increase in share count.

So, is now the time to buy NVIDIA and can the company keep delivering the exceptional results it has managed over the last year?

Could NVIDIA Get a Boost After the Split?

While stock splits don’t change the intrinsic value of a company, stock prices often do move upward in response to them.

This is because splits typically signal that a company is doing well and expects its share prices to continue rising. As such, investor interest and buying activity can increase, putting a slight upward pressure on share prices. Given NVIDIA’s already high-profile status, it’s quite possible that this dynamic will play out in its case once the split occurs.

This isn’t, however, an absolute guarantee. Tesla, for example, saw its share prices fall slightly in the immediate aftermath of its August 2022 stock split.

Given that splits don’t fundamentally change the value of a company either positively or negatively, though, investors should focus more on NVIDIA’s investment thesis and value proposition.

The most important driver for NVIDIA shares will be the company’s impressive performance so far this year. In Q1, NVIDIA’s revenues rose 262% over the year-ago period to reach $26.0 billion. Net income made an even more enormous stride, advancing 628% to reach $14.9 billion.

One of the key growth drivers was data center revenue, which rose by 23% from the previous quarter alone to account for $22.6 billion of the company’s quarterly revenue. The company also continued its bet on AI technology in Q1, introducing new AI integrations for Windows PCs.

The Bear Case for NVIDIA

The question of whether NVIDIA is overvalued has been one of the biggest debates surrounding this stock for several years.

NVIDIA bulls point out that the company enjoys a massive moat in the AI chip market and could see many more years of double-digit growth.

Bears, meanwhile, bring up the extremely high multiples the stock trades at and question whether a company that’s already so large can reasonably justify this kind of pricing.

To the bear case, there’s little doubt that NVIDIA is expensive. Shares currently trade at 48.3x forward earnings and 46.0x sales.

However, these high metrics are somewhat offset by the expected high rate of future earnings growth. NVIDIA shares trade at 1.2 times expected earnings growth, marking them as being more or less fairly valued as long as it can avoid any missteps in its expansion.

This view of the stock largely tracks with current analyst price forecasts. The median price target for NVDA is $1,200, about 4.4% above the current trading price. Though this doesn’t leave much room for upside, it’s clear that Wall Street doesn’t see NVIDIA as being significantly overpriced.

The Bull Case for NVIDIA

NVIDIA has proven its ability to generate excellent profits. The company’s trailing 12-month net margin is 53.4%, a rate that resulted in nearly $30 billion in total profit over the last year.

With revenues expected to rise by almost another 80% over the coming year, NVIDIA’s earnings growth doesn’t seem to be in any kind of immediate peril.

With that said, NVIDIA’s valuation assumes that it will remain dominant as businesses invest in AI technology. Right now, that assumption is probably a valid one. There are, however, some potential competitors that investors may want to watch for.

AMD, for example, has invested heavily in AI chips that can compete effectively with NVIDIA’s GPUs.

Another emerging challenger could be Cerebras, a startup that earlier this year unveiled a chip that’s about 56 times larger than NVIDIA’s flagship H100.

As hopeful competitors continue to innovate, NVIDIA is likely to face more competitive pressure going forward than it does today.

Is NVIDIA Opening The Door To Competitors?

NVIDIA also struggles with delivery times, a fact that could create opportunities for competitors hoping to fill in gaps in the industry.

At the moment, the lead time for an H100 is about two months. The strong demand that creates these lead times, however, could also be an opportunity for NVIDIA.

The company recently announced a change in chip packaging for its AI server chips that is expected to accelerate production capacity.

If it can make similar improvements to the rest of its chip lines, the market will likely continue to buy up as many chips as NVIDIA can produce.

Is Now the Time to Buy?

Ultimately, NVIDIA’s high valuation does make it a bit risky. The company’s ability to rapidly raise earnings and deliver exceptional margins, though, has been proven over the past year.

With potential competitors still far behind NVIDIA and no slowdown in AI investment on the immediate horizon, NVIDIA can likely justify its price tag.

Investors may not be getting any bargains in NVDA right now, but they are likely paying a more or less fair price provided NVIDIA continues to execute as it has over the past year.

All other things being equal, now may be as good a time as any to buy NVIDIA shares for the long-term. The company’s recent performance has been exceptional, and the market in which it operates is only set to grow over the coming years.

From now through 2030, the AI chip market is expected to expand at a compounded annual rate of about 37.9%. With that market potentially reaching over $200 billion in less than a decade, NVIDIA’s opportunity for continued growth appears quite strong.

Though the split itself is likely to have little impact on share prices, NVIDIA shows no signs of slowing down in the near future. The company’s high valuation is still a bit of a concern, but recent results suggest that NVIDIA is one of relatively few mega-cap companies that can sustain such high value multiples.

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