For many investors, Nvidia (NASDAQ: NVDA) has emerged as the quintessential artificial intelligence (AI) stock. That’s because the company’s graphics processing units (GPUs) are the industry standard in accelerating complex data center tasks, such as training machine learning models and running AI applications.
Nvidia shares have surged 780% since the generative AI application ChatGPT went viral in late 2022. That event triggered a tidal wave of AI infrastructure spending that is still building momentum, and Nvidia has been one of the biggest beneficiaries. In turn, the stock has become a staple of the AI trade.
Nvidia reset its soaring share price in June by conducting a 10-for-1 stock split. Shares have since tumbled about 2%, but history says Nvidia stock may have further to fall.
Stock-split stocks like Nvidia typically outperform the S&P 500
Generally speaking, companies conduct forward stock splits after substantial share price appreciation, which itself is suggestive of compelling growth prospects and a competitive edge. Companies that possess those qualities tend to produce above-average returns for shareholders.
Indeed, Bank of America reviewed data back to 1980 and found a correlation. Companies that split their stock returned an average of 25.4% during the 12 months after announcing the split. By comparison, the S&P 500 returned an average of 11.9% during the same period.
Here’s what that could mean: Nvidia announced its latest stock split after the market closed on May 22, 2024. The stock traded at a split-adjusted $95 per share. History says its share price will increase 25.4% to $119 by May 2025. But the stock already trades at $119 per share, leaving zero implied upside (or downside) over the next eight months.
Nvidia is the market leader in artificial intelligence chips
Nvidia dominates the market for data center GPUs, chips used to speed up workloads like AI applications. The company accounted for 98% of data center GPU shipments in 2023, essentially unchanged from the prior year, and those GPUs account for more than 80% of AI chips.
There are two reasons for that dominance. First, Nvidia designs the most powerful GPUs money can buy, and rapid product development keeps its GPUs on the cutting edge in terms of performance. Second, Nvidia complements its chips with a robust ecosystem of software libraries and developer tools called CUDA. The CUDA platform streamlines the building of GPU-accelerated applications.
According to Grand View Research, graphics processor sales are projected to grow at 27% annually through 2030, driven by the proliferation of machine learning and AI. Nvidia’s sales should increase at a similar pace, plus or minus a few percentage points. However, earnings may grow a bit faster due to share repurchases and potential margin expansion driven by pricing power.
Wall Street forecasts adjusted earnings will increase at 35% annually through fiscal 2027 (ends January 2027). That consensus makes the current valuation of 54 times earnings look tolerable. Investors should consider buying a small position in Nvidia stock today, provided they are comfortable with volatility and willing to hold their shares for at least three to five years.
