Sunday, 20 October 2024
by BD Banks
The past few years have marked a renaissance in the popularity of stock splits. The practice was commonplace during the 1990s but had fallen out of favor, only to be discovered by a new generation of investors over the past few years. Companies will generally make the decision to split their shares after years of strong growth and solid financial results that fuel a surging stock price.
This year provides a few excellent examples:
The common thread that weaves these disparate companies together is years, if not decades, of market-beating returns.
If I could buy only one stock right now, Nvidia tops my list. Here’s why.
Image source: Getty Images.
Most investors (myself included) would point to the massive opportunity represented by artificial intelligence (AI) as the primary reason to own Nvidia stock. That’s certainly one of the most important factors (more on that in a bit). However, one of the more intriguing aspects of the company is CEO Jensen Huang’s uncanny ability to anticipate the next big thing and design solutions to meet that need.
Nvidia pioneered the graphics processing unit (GPU) that revolutionized gaming in 1999, but the company was already looking ahead and by 2006, had adapted the technology to accelerate supercomputing. The humble GPU is now the gold standard for cloud computing and data centers everywhere, with a dominant 98% of the data-center GPU market last year, according to data provided by TechInsights.
There’s more. Investors might be surprised to learn that Huang positioned Nvidia to tackle the oncoming AI revolution all the way back in 2013, betting the company’s future on technology that had not yet come into its own. When AI went viral early last year, Nvidia was able to reap the seeds Huang had sown a decade earlier.
“A picture paints a thousand words,” or so the old saying goes. In this case, however, it’s Nvidia’s financial results that tell the tale. For the fiscal 2025 second quarter (ended July 28), Nvidia generated record revenue of $30 billion, which surged 122% year over year and 15% sequentially. The results were driven by record data-center revenue of $26.3 billion, which jumped 154%. Profits also soared, as evidenced by diluted earnings per share (EPS) of $0.67, an increase of 168%.
Management expects Nvidia’s winning streak to continue, albeit at a slower pace. Nvidia’s forecast is guiding for revenue of $32.5 billion, which would represent year-over-year growth of 79%, with a corresponding bump in profitability. While that’s slower than the triple-digit growth the company had delivered for five consecutive quarters, it’s a remarkable accomplishment nonetheless.
I can guess what you’re thinking. Sure, Nvidia has been a rocket ship since early last year, but the low-hanging fruit has already been picked. After all, the stock has surged 837% since the start of last year (as of market close on Thursday ) and hit a new record high just this week.
Here’s the thing. We’re still in the early stages of AI, and new-use cases are still being developed. Some will point to the early fumbles as proof that the technology isn’t yet ready for prime time. While that’s partially true, it won’t be long before the bugs are worked out and AI comes into its own. With that in mind, I’d argue that the best AI-related gains are yet to come.
Estimates regarding the size of the generative AI market abound, yet there’s no consensus. The market is estimated to be worth $1.3 trillion by 2032, according to Bloomberg Intelligence. A more bullish estimate comes courtesy of Ark Invest’s Big Ideas 2024 report, where Cathie Wood posits that the AI software market alone could generate incremental spending of $13 trillion by the end of the decade. Her bull case is even more eye-catching at $37 trillion. The truth is that we don’t know how big generative AI will be, yet estimates continue to ratchet higher.
Furthermore, bears would say the stock is exorbitantly expensive and “priced to perfection,” and they’d have a point. Nvidia stock is currently selling for 64 times earnings and 35 times sales, which in most cases would be outrageous. And if the situation were different, I might be tempted to agree.
However, analysts’ consensus estimates, which have proven to be conservative over the past year, expect Nvidia to generate EPS of $4.05 for its fiscal 2026, which kicks off in January. Based on the stock’s closing price on Thursday, that works out to about 33 times forward earnings, which isn’t much more expensive than the multiple of 30 for the S&P 500. Wall Street also expects Nvidia to grow its profits by 52% annually over the coming five years, which illustrates why the stock is worthy of a premium.
Taken in its entirety, this lays out a compelling case that Nvidia’s growth is far from over, the addressable market for AI continues to grow, and the stock isn’t as expensive as it might seem.
There’s one more thing: I’m counting on Huang to predict the next big thing and pivot Nvidia’s technology to provide solutions — and profit handsomely.
It doesn’t get much better than that, which is why if I could only buy one stock right now, it would be Nvidia.
Before you buy stock in Nvidia, consider this:
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Danny Vena has positions in Chipotle Mexican Grill, Nvidia, and Super Micro Computer. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.