Nvidia (NASDAQ: NVDA) was a $360 billion company at the start of 2023, but thanks to a whopping 745% gain in its stock price, the company is now worth over $3 trillion. It's experiencing a surge in demand for its data center chips, which are the most powerful in the industry for processing artificial intelligence (AI) workloads.
In June, Nvidia stock was trading at over $1,200 per share, which made it somewhat inaccessible to smaller investors, so management executed a 10-for-1 stock split effective June 10. The split increased the number of shares in circulation tenfold and organically shrank the price per share by 90%.
It hasn't changed the underlying value of the company, but investors can now buy one share of Nvidia for just $123 (as of this writing).
Stocks can sometimes get a boost after they split as a broader investor base swoops in to buy, but that alone isn't a good reason to pile into Nvidia. Investors should focus on the company's fundamentals instead, and here are two great reasons to buy the stock.
1. Rapid revenue and earnings growth
Nvidia CEO Jensen Huang estimates there will be around $1 trillion in spending on data centers over the next five years as operators try to meet demand for computing capacity from AI developers. Nvidia's H100 graphics processing unit (GPU) set the standard for AI chips, and as a result, the company has a market share of more than 90% in the segment.
That allows Nvidia to charge a premium for its chips, which is driving incredible growth in its revenue and earnings. In the recent fiscal 2025 Q1 (ended April 28), the company generated a record $22.6 billion in data center revenue alone, which was a 427% increase from the year-ago period. It marked the fourth consecutive quarter of triple-digit percentage growth in the data center segment.
Nvidia's Q1 earnings per share soared 461% to $6.12 as the company's gross profit margin continued to climb, reaching 78.9%. Three years ago -- before the AI boom started and gaming was Nvidia's largest segment -- its gross profit margin was around 66%. That highlights just how profitable the company's data center GPUs are, thanks in part to its pricing power.
Demand is unlikely to slow in the foreseeable future. While the H100 is still a popular GPU, Nvidia has since released the faster H200. Plus, the company is ramping up production of a new generation of GPUs based on its Blackwell architecture. The GB200, for example, is capable of performing AI inference at five times the speed of the H100. That means developers can build their models much faster, and considering they often pay for computing capacity by the minute, that translates to significant cost savings.
Competition is growing, though. Advanced Micro Devices recently started shipping its MI300 data center GPU, which has shown performance advantages over the H100, and it's already attracting many of Nvidia's biggest customers. Although AMD is unlikely to compete with new chips like the GB200 any time soon, any market share it snatches from Nvidia could pressure the latter's coveted pricing power.
2. Despite blistering gains, Nvidia stock still might be cheap
As I mentioned, Nvidia stock is up 745% since the start of 2023. But it might still be cheap, at least by the widely used price-to-earnings (P/E) ratio, which divides a company's share price by one year's worth of its earnings per share. Investors often use that metric to measure the value of a stock relative to the rest of the market.
Nvidia generated $1.80 in earnings per share over the last four quarters (adjusted for the stock split), and based on its stock price of $123.54 at the time of this writing, it trades at a P/E ratio of 68.6. That's more than double the 31.9 P/E ratio of the Nasdaq-100 index, implying Nvidia is extremely expensive relative to its peers in the tech sector.
However, investors are willing to pay a premium for Nvidia because its earnings are rapidly catching up to its surging stock price. For example, Wall Street analysts predict Nvidia will generate $2.72 in earnings per share for the fiscal 2025 full year, giving the stock a forward P/E ratio of 45.4. They also forecast $3.74 in earnings during fiscal 2026, translating into a forward P/E ratio of 33.
In other words, Nvidia shares don't look very expensive relative to the Nasdaq-100 as long as investors are willing to hold onto them for at least the next two years. Of course, there is a risk Wall Street is overestimating Nvidia's earnings potential, in which case the stock is more expensive than it currently appears.
Further upside in Nvidia stock isn't a given
Last year, Goldman Sachs released a report suggesting generative AI could add $7 trillion to the global economy over the coming decade. However, last month, the investment bank issued a new report expressing concerns over the lack of a "killer app," implying companies are struggling to deliver a payoff for all of the money they have spent developing AI so far.
Huang's forecast for $1 trillion in data center spending over the next five years could be in jeopardy if Goldman's concerns begin to spread through the tech sector. That would directly impact demand for Nvidia's GPUs and drive a slowdown in the company's growth.
But I think there is another reason Nvidia investors should be cautious. Artificial general intelligence (AGI) describes the moment when AI matches human intelligence in most cognitive tasks. Some researchers -- including one who worked for ChatGPT creator OpenAI -- believe AGI could be achieved as soon as 2027 based on the rapid pace of development right now.
Developing AI beyond the point of AGI could yield diminishing returns, because the number of commercial workloads that could benefit from such a high degree of machine intelligence is probably very small. If that's the case, demand for Nvidia's GPUs could plummet because the number of developers who want (or can afford) further performance increases will probably shrink.
Nvidia operates a fantastic business and it's a clear-cut leader in the market for AI data center chips, but investors who buy the stock today should do so with their eyes wide open to the potential risks, because further blockbuster returns are not a given.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Goldman Sachs Group, and Nvidia. The Motley Fool has a disclosure policy.
Forget the Stock Split: 2 Better Reasons to Buy Nvidia Stock Right Now was originally published by The Motley Fool