Nvidia (NVDA -1.95%) has been a growth machine recently. Revenue and profits are through the roof. The chipmaker has become synonymous with artificial intelligence (AI). Its high-powered chips are in heavy demand to power those AI's computationally intensive systems, and they have become crucial for many companies. The downside for investors may be that the stock has already generated such impressive returns that it may be too late to benefit much from the growth.
The stock is up more than 220% over the past year and the company's market cap now tops $2 trillion. Some investors now wonder if they would be better off waiting for a dip in Nvidia's stock price. Or should they add shares now anyway?
The bullish case for Nvidia
As expensive as Nvidia's stock is, the sheer potential in AI suggests investors should remain bullish on it as an investment. The technology is still in its early stages, and companies are just beginning to develop AI models. According to a recent forecast from Gartner, the global market for AI chips will soar to $119.4 billion by 2027, which is more than double what it was worth in 2023.
Nvidia, being a dominant player in the industry and a provider of AI chips, stands to benefit from this growth. In the company's most recent fiscal year, which ended Jan. 28, revenue grew by 126% to just under $61 billion, and net income was nearly half of that at around $30 billion.
As demand for AI chips grows, it's easy to see a path for Nvidia's earnings to continue growing, making its current valuation less problematic for long-term buy-and-hold investors.
The bearish case for Nvidia
The biggest concern with these AI developments is that reality won't align with the hype. OpenAI CEO Sam Altman has stated that when it comes to what AI can do, "people are begging to be disappointed and they will be." While it can enhance productivity, the technology's potential, at least in the near term, may have been oversold.
In the meantime, investors in many companies are paying for those sky-high expectations. Nvidia's valuation may look relatively reasonable when you look at its price/earnings-to-growth ratio, which is around 1.2, but that still implies a high level of earnings growth over the next five years. If those assumptions prove to be too optimistic, then that could make the AI stock vulnerable to a sell-off.
Plus, there's always the risk of a recession. While there's talk of a potential soft landing for the U.S. economy, if it performs worse than expected, companies could scale back on their AI-related investments and spending, especially if the gains they are seeing from it aren't immediate or impactful enough.
Should you invest in Nvidia's stock?
Nvidia is a leading AI company and it could be a great way to invest in tech. But investors should consider its valuation, and what assumptions they're relying on when they look at its price tag. If you're bullish on AI and believe it will be a game changer for industries and companies around the world, then it's certainly not too late to invest in Nvidia given its dominant presence in the space and the growth opportunities ahead.
Trying to time the market, however, and waiting for a dip in Nvidia's stock may not be ideal because odds are it's not going to come down significantly unless there's a broader market sell-off related to the economy, which would mean its growth prospects have taken a big hit, in which case the entire investing thesis in the stock may change as well. So as long as you're bullish on AI, Nvidia can still be a good buy right now.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
