Looking at some share price charts for NVIDIA (NASDAQ: NVDA), it may look like things just fell off a cliff. But that is because NVIDIA stock has surged so much lately that it was recently split, meaning shares are subdivided to bring the price per share back to a lower level.
Normally that should not affect the overall value of a shareholding – the price per share goes down, but the number of shares goes up and in theory at least the overall value does not change.
Ignoring the split, NVIDIA stock has been on fire this year, increasing by over 150% since the start of 2024.
We are not even halfway through the year yet – could the chip company keep soaring?
Transformed demand landscape
In short, the answer is ‘yes’. NVIDIA stock could keep soaring.
But if we change the question from could it to will it, it is much harder for me to form an opinion as an investor.
While the recent price rise might look like a bubble, in fact, I think it has some financial foundations. AI has been all the rage in boardrooms over the past couple of years. NVIDIA is in prime position to benefit – and has been doing so in bucketloads already.
The company has unique expertise and proprietary technology that have helped its chip sales soar on the back of the AI demand boom.
Just look at the numbers.
In the first quarter, NVIDIA’s revenue more than tripled from the same period last year, to a record $26bn. Net income soared over 600% from the same quarter last year, to $15.2bn. It raised its quarterly dividend 150%.
Clearly AI is not just a hot idea for NVIDIA. Concretely, sales and profits have surged already, explaining why NVIDIA stock has gone through the roof.
Things could keep going – but will they?
What comes next?
I expect demand for AI chips to stay high. But will they be as high as recently, or, once the initial installations have been made, will demand fall back? For now, I see that uncertainty as a key risk to NVIDIA sales.
The company still looks set to do well. It has an installed customer base and proprietary offerings. The barriers to entry for chipmaking are very high. So although demand has surged, it may take years or even decades for newcomers to establish themselves to be effective competitors with existing leaders like NVIDIA and TSMC.
I’m watching without buying
That means that we could continue to see a lot of volatility in NVIDIA stock – in either direction.
The price-to-earnings ratio of 71 already looks too high for my comfort as it offers me little margin of safety as an investor. Bear in mind too that earnings have soared. If they move down sharply, even to where they were a year ago, that valuation could look even more frothy.
So, although I see an argument that NVIDIA stock could keep moving up handily in price, the uncertain demand outlook is a big risk in my view. At the current valuation, I am not investing.
