Summary
Nvidia recently completed a 10-for-1 stock split, stirring excitement among investors. This article delves into the implications of this move, explores Nvidia’s dominance in the AI industry, and examines why some investors are still cautious despite the company’s impressive performance.
Nvidia’s 10-for-1 stock split marks a significant milestone, but historical patterns suggest caution for potential investors.
Introduction to Nvidia’s Stock Split and Its Significance
One of the most anticipated events of the year is officially over. Less than 24 hours ago, following the close of trading on a recent Friday, Nvidia (NASDAQ: NVDA), the infrastructure backbone of the artificial intelligence (AI) revolution, completed its 10-for-1 forward split. This move has generated significant buzz among investors and tech enthusiasts alike.
A “stock split” allows publicly traded companies to cosmetically alter their share price and outstanding share count by the same magnitude. This adjustment is purely cosmetic, as it does not affect a company’s market cap or operating performance. Stock splits can make shares more nominally affordable for retail investors, as seen with forward-stock splits. They can also increase a company’s share price to ensure continued listing on a major stock exchange, as observed with reverse-stock splits.
Over the past three years, investors have gravitated towards stock-split stocks due to their history of outperforming the market. More than a dozen high-flying stocks have announced and/or enacted forward-stock splits since the midpoint of 2021, including Nvidia, which has now completed its second split since July 2021.
Nvidia’s Market Value and AI Dominance
On paper, Nvidia has given investors every reason to hop aboard and enjoy the ride. On June 5, Nvidia’s market cap topped $3 trillion for the first time, surpassing Apple for the No. 2 spot among America’s largest publicly traded companies. Since the beginning of 2023, Nvidia has added roughly $2.68 trillion in market value, driven entirely by AI.
Nvidia’s AI-inspired graphics processing units (GPUs) are the cornerstone of high-compute data centers. Based on varied estimates, Nvidia’s chips account for around 90% of the AI-GPU market share, with the ultra-popular H100 GPU powering generative AI solutions and helping to train large language models. The company’s next-generation Blackwell chip, priced between $30,000 to $40,000, is believed by some Wall Street analysts to be sold out well into 2025. With demand overwhelming supply, Nvidia has had no trouble raising the price of its AI GPUs and reaping the rewards of a massive uptick in gross margin, which stood at 78.35% in the fiscal first quarter of 2025, which ended April 28.
Despite Nvidia’s stock gaining 738% in a little over 17 months, it still appears reasonably cheap on a fundamental basis. Although shares are trading roughly 34 times forward-year earnings, Wall Street’s consensus calls for an annualized earnings growth rate of 46.5% over the next five years.
The Historical Perspective and Investor Caution
While Nvidia looks perfect following its 10-for-1 stock split, investors should not judge a book solely by its cover. Taking a step back, widening the lens, and allowing history to guide us can lead to a different investment view of Nvidia over the coming months and years. Although the company has been firing on all cylinders and surpassing even the loftiest expectations, there are reasons to approach Nvidia’s stock cautiously.
The primary reason for this caution is the history of next-big-thing innovations. Since the advent of the internet roughly three decades ago, Wall Street has seen numerous trends that are expected to change corporate America’s growth arc. These innovations include genome decoding, the rise of nanotechnology, business-to-business commerce, 3D printing, blockchain technology, and the metaverse. While some of these trends have been successful over the long run, they all share one thing: an early-stage bubble-bursting event. Investors have consistently overestimated the adoption of new technologies and innovations for more than 30 years. Every game-changing innovation comes with immense promise and lofty analyst expectations. Unfortunately, every innovation needs time to mature, and artificial intelligence is unlikely to be an exception. If and when the AI bubble bursts, Nvidia could face significant challenges.
While it is unclear when the AI bubble might burst, history has shown that stock valuations can remain extended for years before correcting. Eventually, however, every innovation navigates through a bubble-popping event. Subtle warnings from Nvidia suggest that the peak may be here or nearby. Nvidia’s fiscal second-quarter gross margin guidance of 75.5%, plus or minus 50 basis points, is a red flag. After increasing its gross margin by 13.8 percentage points in a year, a forecast decline of 235 to 335 basis points might seem insignificant. However, it is noteworthy when considering that external competitors are entering the AI-GPU market, and Nvidia’s top four customers, which account for roughly 40% of its sales, are internally developing AI-GPUs for their data centers.
This forecast decline in sequential quarterly gross margin could signal that Nvidia’s pricing power has peaked. If GPU scarcity wanes, Nvidia’s pricing power will taper as well.
Comparing Nvidia to Historical High-Valuation Stocks
The third reason for caution regarding Nvidia is its valuation. Although Nvidia is still relatively inexpensive based on the price-to-earnings-growth ratio (PEG ratio), it has reached a level of historic priciness based on trailing 12-month (TTM) sales that rivals only Amazon and Cisco Systems before the dot-com bubble burst. In late March 2000, Cisco Systems peaked at just shy of 39 times TTM sales, while Amazon topped 43 times TTM sales in January 1999 before experiencing a significant decline. Nvidia is currently sitting at a multiple of 38 times TTM sales.
While history may not repeat perfectly on Wall Street, it often rhymes. Given these historical patterns, some investors remain cautious about Nvidia’s stock despite its impressive performance and promising future in AI.
Conclusion: Balancing Optimism and Caution
Should you invest $1,000 in Nvidia right now? Before making such a decision, consider the broader context and historical patterns. While Nvidia has demonstrated remarkable growth and innovation in the AI sector, history suggests that caution is warranted. The Motley Fool Stock Advisor analyst team recently identified the 10 best stocks for investors to buy now, and Nvidia was not among them. The 10-cut stocks could produce substantial returns in the coming years.
In conclusion, while Nvidia’s 10-for-1 stock split and dominance in the AI industry are noteworthy achievements, potential investors should carefully weigh the risks and historical patterns before making investment decisions. Balancing optimism with caution is essential in navigating the ever-evolving landscape of technology and finance.
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