Nvidia Spiked Another 15%: Take Profit or Next Bull Run?
2 reasons why Nvidia is still a bargain and alternative to gain exposure in Nvidia.
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Over the past week alone, Nvidia's shares have skyrocketed by another jaw-dropping 15%, and that's just the tip of the iceberg. We're talking about a stock that has gained a mind-boggling 33% over the past month and a staggering 249% over the past year!
But here's the kicker: Nvidia's meteoric rise isn't just some flash in the pan, fueled by hype and speculation. This company has earned every single percentage point of those gains through sheer grit, determination, and a relentless pursuit of innovation.
Is Nvidia too expensive now? We outline 2 reasons why it is still a bargain.
Exponential earnings growth
In 2022, Nvidia's earnings per share stood at a respectable $3.34. Fast forward to 2023, and that figure has spiked to a whopping $12.96 – a growth trajectory that would make even the most ambitious startup founder green with envy. But wait, there's more! Analysts are predicting that Nvidia's earnings will more than double to a staggering $26.89 per share in 2024, all thanks to the insatiable demand for its chips in the burgeoning field of artificial intelligence.
Even with the recent spike in share price, Nvidia still looks like a relative bargain at 36 times its 12-month forward earnings, which is not to high compared to Nasdaq 100’s price to earnings ratio of 33 times.
In the fourth quarter alone, Nvidia's revenue surged by a jaw-dropping 265% year-over-year, hitting a record-shattering $22.1 billion. And what's driving this explosive growth? Two words: AI hardware. Nvidia's cutting-edge graphics processing units (GPUs) are the hot commodity in the world of artificial intelligence, with data center clients clamoring to get their hands on these bad boys to train and run their AI algorithms.
But it's not just about revenue growth, folks. Nvidia's profitability is skyrocketing at a rate that would make even the most hardened Wall Street tycoon weak in the knees. In the fourth quarter, the company's net income jumped an eye-watering ninefold to a staggering $12.3 billion. And let's not forget about those astronomical margins – we're talking a software-like gross margin of 76%, up from a mere 63.3% in the prior year. It's like Nvidia has discovered the holy grail of profitability, leaving its competitors in the dust.
Economic moats against its competitors
Nvidia isn't just resting on its laurels and basking in the glory of its current success. This company is always one step ahead of the game, constantly innovating and pushing the boundaries of what's possible.
Take, for instance, Nvidia is already planning to launch its latest flagship GPU, the H200, boasting more memory and faster algorithm training speeds than its predecessor, the H100. And while its rivals are still trying to catch up to the H100, Nvidia is already launching its successor, leaving the competition in a perpetual state of catch-up.
But that's not all, folks. Nvidia isn't just content with dominating the hardware side of the AI equation. This company is also tackling the $30 billion custom chip opportunity head-on, with a new segment designed to help clients build AI chips tailored to their specific use cases. With Nvidia's scale and design expertise, it could very well make custom chips more efficiently than its clients could on their own, further solidifying its position as the undisputed king of the AI hardware realm.
What are the potential risks?
But let's not get too carried away, folks. As with any investment, there are always risks to consider. In Nvidia's case, the biggest potential headwind is the possibility that the AI market might not live up to the lofty expectations that have been set for it.
According to reports, AI chatbots are currently losing money with every customer search due to their high operating costs, and it's still unclear how companies plan to monetize these fancy digital assistants. Now, as the producer of the "picks and shovels" in this AI gold rush, Nvidia is currently shielded from the lack of profitability in consumer-facing AI applications. But if companies continue to burn cash on AI, they might eventually scale back their spending on Nvidia's hardware, putting a damper on the company's growth prospects.
That said, the good news is that Nvidia's current valuation seems to already factor in the possibility of a slowdown, which means that even if the AI hype fizzles out a bit, the stock might not take as big of a hit as some might expect.
How to get exposure without owning Nvidia directly?
If you own any sort of market-cap-weighted S&P 500 ETF, you already have exposure to Nvidia. In the SPDR S&P 500 ETF, for instance, Nvidia is the third-largest holding, accounting for a whopping 5.9% of the portfolio, trailing only the two tech titans, Microsoft and Apple.
What if you want to own more Nvidia? The iShares Russell 1000 ETF, for example, has a staggering 9.4% of its portfolio in Nvidia, which is a big reason why it's returned a solid 5.5% over the past month, outperforming the SPDR S&P 500's 4.2% gain. But for diversification purposes, the typical investor probably doesn't want to have more than 10% to 15% of their portfolio tied up in any single stock, no matter how promising it might seem.
Summary
So, there you have it, folks – the lowdown on Nvidia, the tech titan that's been setting the stock market ablaze with its red-hot performance. Is it a surefire bet? Nothing in the investing world ever is. But with its impressive track record, innovative spirit, and dominant position in the rapidly growing AI hardware market, Nvidia is certainly a stock worth keeping a close eye on – especially if you can snag it at a discount during one of its inevitable pullbacks.
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Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.