What a difference a year makes. After the Nasdaq Composite After losing 33% of its value in 2022, one of the market’s worst performances in over a decade, the index has almost returned to its former glory, closing the door on 2023 with a 43% gain. .
The story gives an idea of what might happen to us in the coming year. Since its beginnings in 1972, each year since bear market rebound, the technology-heavy index continued to recover, gaining 19% on average. While there are no guarantees of investment, this suggests that the current recovery still has more room to run.
One strategy investors use to find winning stocks is to look at companies that have done stock splits in recent years, because these moves are historically preceded by years of robust gains. One of these companies is Nvidia (NASDAQ:NVDA). Over the past decade, the stock has generated total returns of 12,780%, resulting in a 4-for-1 split in mid-2021.
The chipmaker posted gains of 239% last year, causing some investors to worry about its valuation. However, a little digging will uncover evidence that the stock is cheaper than it would appear by some measures.
The AI catalyst
Recent advancements in the field of artificial intelligence (AI) have been a boon for Nvidia. Specifically, generative AI went viral last year and these algorithms were applied to a wide variety of mundane and time-consuming tasks, leading to greater productivity. Increased efficiency generally translates into greater profits, and companies have been scrambling to integrate AI models into their operations to reap the expected windfalls.
So why is this important to Nvidia? In short, the company produces the benchmark in graphics processing units (GPUs), which can not only provide the computing power needed to render realistic images in video games, but can also provide the computing power needed to support AI systems. This is all possible thanks to parallel processing, which takes computationally intensive tasks and breaks them into smaller, more manageable chunks, allowing GPUs to perform a multitude of complex mathematical calculations simultaneously.
As a result, Nvidia processors have been deployed in a wide range of applications, including cloud computing and data centers, which will serve as hubs for many AI systems.
Accelerated adoption of AI will play to Nvidia’s strengths, and while estimates vary widely, there is general consensus that the opportunity is staggering. According to a Bloomberg Intelligence report, the generative AI market will grow from $40 billion in 2022 to $1.3 trillion by 2032, a compound annual growth rate (CAGR) of 42%.
The proof is in the pudding
A quick look at Nvidia’s recent results helps illustrate the potential of AI. During the third quarter of fiscal 2024 (which ended October 29), Nvidia’s revenue increased 206% year-over-year to $18.1 billion – a record for the company – while its diluted earnings per share (EPS) soared 1,274% to $3.71. These percentages were partially skewed by easy comparisons resulting from the tech sector slowdown in 2022, but help illustrate the scale of the opportunity.
Investors shouldn’t expect the company’s triple- or four-digit earnings to continue over the long term, but its continued growth should nonetheless be robust. For its current fiscal fourth quarter, management is forecasting additional record results, including revenue of $20 billion in the middle of its forecast range, which would represent a 230% year-over-year increase. the other. This shows that the AI opportunity is far from over.
There is more good news. Nvidia is the undisputed market leader for chips used for machine learning – an established branch of AI – controlling about 95% of the market, according to New Street Research.
As the default provider of AI processing solutions, Nvidia is well-positioned to take advantage of this secular tailwind.
The game is on
Although the prospects for AI are intriguing, Nvidia has several other growth drivers up its sleeve. For example, the recent crisis in the video game market is starting to reverse itself. The global gaming graphics card market is expected to grow from $3.65 billion in 2024 to $15.7 billion by 2029, a CAGR of 34%, according to market research firm Mordor Intelligence. As a leading gaming GPU supplier, this secular tailwind will also boost Nvidia.
Nvidia is also the leading supplier of processors used to compress data over the ether and around data centers, with about 95% of that market, according to Angelo Zino, an analyst at CFRA Research. Digital transformation shows no signs of slowing down as companies move even more workloads and business systems to the cloud. The data center boom is therefore likely to continue. The data center market is expected to grow from $263 billion in 2022 to $603 billion by 2030, a CAGR of approximately 11%, according to Prescient and Strategic Intelligence Market Research.
All of this shows that Nvidia’s chips are much more than the gold standard in AI: its products are also the semiconductors of choice for the gaming, cloud computing, and data center markets.
The 800-pound GPU gorilla
After Nvidia shares posted gains of more than 200% in 2023, investors are understandably worried about its valuation – but there’s a catch.
The stock currently sells for 27 times sales and 65 times earnings – high numbers that seem to confirm investors’ concerns. However, these metrics don’t take into account Nvidia’s triple-digit growth rate. For such a rapidly expanding company, the most appropriate metric to use is the price-to-earnings-to-growth (PEG) ratio, which for Nvidia is less than 1 – the standard for an undervalued stock. For the S&P500, the PEG ratio is above 2, which further places Nvidia’s valuation in the right context.
Given its dominant position in many growing markets, strong growth history, and reasonable valuation, Nvidia is a split stock that investors should buy ahead of an expected Nasdaq rally in 2024.
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Danny Vena has positions at Nvidia. The Motley Fool Ranks and Recommends Nvidia. The Mad Motley has a disclosure policy.
History Says Nasdaq Will Skyrocket in 2024: 1 Great Fractional Stock to Buy Before It Does was originally published by The Motley Fool
