NVIDIA (NASDAQ: NVDA) is one of the most talked about stocks today, and it's easy to see why. Its leadership in the artificial intelligence (AI) accelerator market has fueled its revenue growth, making it the largest semiconductor stock by market capitalization after the United States. apple.
Unfortunately for investors looking to buy Nvidia stock, its success will already determine whether it's worth buying Now A more difficult question. Does its technology leadership and continued improvements make it a no-brainer buy, or does its valuation make it too expensive at current levels?
Most tech investors know that the company's AI accelerator and revenue growth are the main reasons for the stock's rise. As a result, the data center business that designs AI chips has risen from the company's second largest source of revenue to accounting for 88% of the company's revenue in just three years.
This is fortuitous given the evolving state of the AI chip industry. Grand View Research predicts that by 2030, the compound annual growth rate will reach 29%. Between forecasted growth and a shortage of accelerators, Nvidia is also the company best positioned to serve this market.
The innovation doesn't stop with accelerators or the CUDA software platform that cements its dominance of artificial intelligence chips. Nvidia continues to develop a host of new products, some of which were just announced at CES.
These include graphics cards built on the Blackwell architecture and other artificial intelligence-driven advancements aimed at powering humanoid robots and self-driving cars. While time will tell how these products perform in the market, this innovation increases the likelihood that Nvidia will play a more significant role in the tech industry for the foreseeable future.
To this end, Nvidia generated $35 billion in revenue in the third quarter of fiscal 2024 (ending October 27, 2024), a year-on-year increase of 94%. Against the backdrop of this improvement, third-quarter net profit reached $19 billion, an increase of 109% over the same period last year.
In fact, investors should be excited about this kind of growth, and seasoned investors know that triple-digit revenue growth over the past few quarters is unsustainable.
Unfortunately, investors tend to punish stocks for slowing revenue growth, and the company's valuation could make it vulnerable, at least if you dig deeper.
On the face of it, its P/E ratio is above 53 S&P 500 Index This is despite the fact that many slower-growing tech stocks have higher P/E ratios. A price-to-sales (P/S) ratio of 30 better highlights how expensive the stock is, but that likely won't deter investors looking to benefit from Nvidia's rapid growth.
Still, a price-to-book ratio of 51 puts its valuation at nose-bleeding levels. In contrast, AMD It trades at just over 3 times book value.
Additionally, Nvidia's success makes it more susceptible to the semiconductor industry's usual cyclical nature. In fact, the stock price is likely to remain unchanged, and it's possible that Nvidia stock will avoid a significant decline in the near term.
Still, its situation exposed a critical vulnerability. New AI accelerators cost more than $30,000. However, if demand declines, prices may follow, a factor that could reduce or even reverse the company's revenue growth.
In the past seven years, Nvidia's stock price has fallen by more than 50% twice. This reversal could bring about another sharp decline.
Thankfully, the cycle also moves upward at some point, so Nvidia stock should eventually recover from any downturn due to its new technology. Still, given that a down cycle will inevitably occur at some point, investors may want to think twice before making large purchases at this time.
Under current circumstances, investors should view Nvidia as a Hold. Given its valuation metrics and the cyclical nature of the chip industry, investors may be paying too much to buy Nvidia at current prices.
Still, the company benefits from its clear dominance of the AI chip industry, and that's unlikely to change anytime soon. Furthermore, its continued innovation is likely to solidify this dominance and fuel longer-term growth.
So when it comes to balancing Nvidia's attributes and challenges, staying the course may be the best course of action for its shareholders.
Before buying Nvidia stock, consider the following factors:
this Motley Fool Stock Advisor The analytics team has just identified what they believe is 10 Best Stocks Investors can buy now... and Nvidia isn't one of them. Here are 10 stocks that could generate big returns in the coming years.
consider when NVIDIA This list was created on April 15, 2005... If you invested $1,000 when we recommended, You will have $807,495!*
stock advisor Provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. this stock advisor Services are more than four times Return of the S&P 500 since 2002*.
See 10 stocks »
*Stock Advisor returns as of January 13, 2025
Will Healy works at Advanced Micro Devices. The Motley Fool owns and recommends Advanced Micro Devices, Apple and Nvidia. The Motley Fool has a disclosure policy.
Is Nvidia stock a buy now? Originally posted by The Motley Fool