This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia (NASDAQ: NVDA) stock has been a superb performer over the short and long terms. The artificial intelligence (AI) chip leader held its initial public offering (IPO) in January 1999, six years after the company was founded. In honor of Nvidia stock turning 25 years old earlier this year, below are 25 reasons -- in no particular order -- to buy it.
As background, Nvidia has four market platforms: data center, gaming, professional visualization, and auto & robotics. Data center is its largest (accounting for 87% of revenue in its most recent quarter) and fastest growing due to surging adoption of AI, particularly generative AI. Generative AI exploded onto the scene in late 2022 with the release of the ChatGPT chatbot.
1. Company is run by a founder
Nvidia CEO Jensen Huang was one of the company's three co-founders. Studies show that stocks of founder-led companies tend to outperform others over the long term.
2. Founder-CEO has much skin in the game
Huang owns about 868 million shares of Nvidia stock following Friday's 10-for-1 stock split (discussed in No. 6), as of the most recent available data. This stake is worth about $105 billion, as of the stock's closing price on June 7. Given this massive stake, investors can be sure Huang's interest is aligned with their interests.
3. CFO's huge stock holdings suggest much confidence in Nvidia's future
CFO Colette Kress owns 6.43 million shares of Nvidia stock following Friday's 10-for-1 stock split (discussed in No. 6). These shares were worth about $777 million, as of June 7. A CFO probably has the best handle of everyone in a company -- including its CEO -- on its financial performance at any given time. So, it seems safe to say that Kress is very optimistic about Nvidia's growth prospects.
4. Nvidia stock's longer-term performance is phenomenal
Over the last 10 years, Nvidia stock has returned 25,431% through June 7. That's more than 100 times the S&P 500 index's return of 230%. Put another way, a $1,000 investment in Nvidia stock a decade ago would now be worth more than $250,000.
A stock's past performance is no guarantee of its future performance. However, a stock's long-term performance often reflects the ability of a company's top management to establish and implement successful strategies.
5. AI market is projected to continue to grow briskly
In 2024, the global AI market is projected to reach revenue of $184 billion, and have a compound annual growth rate (CAGR) of 28.5% through 2030, when it will be worth an estimated $826.7 billion, according to Statista.
This is a huge positive for Nvidia, whose graphics processing unit (GPU) chips and related products and services are used for training and deploying AI applications.
6. Nvidia's 10-for-1 stock split just occured on June 7
On Friday, June 7, Nvidia stock split 10-for-1. Investors who owned the stock as of the day before received nine additional shares for each share they owned. The stock is scheduled to begin trading on a split-adjusted basis on Monday, June 10.
On Friday, Nvidia stock's closing price was $1,208.88, which means that its split-adjusted price was $120.89.
Potential benefits for investors of Nvidia's stock split include a boost in price from greater demand for shares, and a higher chance at being included on the Dow Jones Industrial Average index.
7. The company dominates the data center AI chip market
It's widely estimated that Nvidia has more than a 90% share of the market for AI GPU chips for data centers, and more than an 80% share of the overall data center AI chip market.
8. Data center AI chip market is projected to continue to grow like gangbusters
In 2023, the global market for chips to accelerate AI processing in data centers was worth about $45 billion, according to an estimate by Advanced Micro Devices (NASDAQ: AMD) CEO Lisa Su. She projects this market will reach $400 billion in revenue by 2027, which equates to a blistering CAGR of 72.7%.
9. Nvidia's data center business has strong competitive advantages
Advanced Micro Devices (AMD) and Intel have recently entered Nvidia's turf -- AI-enabling GPUs for data centers. Investors shouldn't be overly concerned. Nvidia's competitive advantages don't only stem from its GPUs, but also its software, particularly CUDA, which has been used by millions of developers for many years. CUDA enables its GPUs to possess the parallel processing capabilities needed for accelerating general and AI computing.
10. Its revenue is growing rapidly
Nvidia's year-over-year revenue growth over the last four quarters starting with the most recent quarter: 262%, 265%, 206%, and 101%.
11. Its profits are increasing even faster than revenue
Nvidia's adjusted earnings per share (EPS) are growing faster than its revenue, which reflects its expanding profit margins. This dynamic is being driven by its highly profitable data center business growing faster than its other businesses. Here's the company's year-over-year adjusted EPS growth over the last four quarters starting with the most recent quarter: 461%, 486%, 593%, and 429%.
12. Its free cash flow is also growing rapidly
Nvidia's year-over-year free cash flow (FCF) growth over the last four quarters starting with the most recent quarter: 465%, 546%, N/A (FCF was negative in year-ago period), and 634%.
13. Wall Street expects strong profit growth over the next 5 years
As of June 7, Wall Street projects that Nvidia will grow adjusted EPS at an average annual rate of 46.5% over the next five years.
14. Nvidia nearly always beats Wall Street's expectations
Nvidia nearly always beats Wall Street's quarterly earnings estimates -- and oftentimes, by a lot. In the prior four quarters, the company's adjusted EPS has exceeded the analyst consensus estimate by percentages ranging from 10% to 29%.
If this dynamic continues, Nvidia's CAGR over the next five years will be higher than the 46.5% that analysts now expect.
15. The stock's valuation is reasonable
At Friday's closing price, Nvidia stock is priced at 44.6 times forward estimated earnings. In a vacuum, this is a high valuation. But it's reasonable for a company that Wall Street expects to grow adjusted EPS 109% this fiscal year and at an average annual rate of 46.5% over the next five years. Moreover, analysts are likely underestimating its growth potential, as covered above.
16. It's much more profitable than its main competitors and peers
| Company | GAAP Profit Margin (TTM) |
|---|---|
| Nvidia | 53.4% |
| Advanced Micro Devices | 4.9% |
| Intel | 7.4% |
| Qualcomm | 23% |
| Broadcom | 29.9% |
List is not all-inclusive. Data sources: YCharts and finviz.com. GAAP = generally accepted accounting principles. TTM= trailing 12 months.
17. It's reportedly forming a custom chip business unit
Sources have reported and signs suggest that Nvidia is forming a custom chip business unit so that it can capture some of the custom chip development work for big tech companies that currently goes to chipmakers such as Broadcom. The new unit will reportedly help companies design custom chips for AI and other applications.
18. It's the largest supplier of graphics cards for gaming
Gaming is Nvidia's second largest market platform, accounting for 10% of its revenue in its most recent quarter. The company is the world's largest supplier of graphics cards for computer gaming. In the first quarter of 2024, it had an 88% share of the desktop discrete GPU market, according to Jon Peddie Research. AMD and Intel had a 12% and less than 1% share, respectively.
19. PC gaming market is projected to continue its solid growth
In 2023, the global personal computer (PC) gaming market generated about $80.3 billion in revenue, according to Statista, which projects this market will be worth $141.9 billion in 2028. That equates to a CAGR of about 12.1%.
20. Nvidia generates some recurring revenue
Nvidia has relatively recently begun launching software and service offerings that generate recurring revenue. In February, CFO Kress said that in fiscal Q4 the company's software and services offerings reached an annualized revenue run rate of $1 billion.
21. Its revenue should get a big boost when driverless vehicles become legal
Nvidia's revenue should get a big boost when driverless vehicles become legal across the U.S. and world. Hundreds of vehicle manufacturers, tier 1 suppliers, and others are developing on the company's autonomous vehicle AI computing platform, DRIVE.
When Nvidia's partners use its DRIVE platform in production vehicles, they need to buy a DRIVE AI computer for each vehicle. Its big-name partners include luxury vehicle maker Mercedes-Benz and electric vehicle (EV) giant BYD.
22. Its sovereign AI business has multibillion-dollar potential
Nations and other sovereign entities have relatively recently begun using Nvidia's technology to build their own sovereign AI cloud services. The "sovereign AI infrastructure market represents a multibillion-dollar opportunity over the next few years," CFO Kress said last November on the company's fiscal Q3 2024 earnings call.
23. It just ramped up its robotics initiatives
In March, Nvidia introduced it Project GR00T (Generalist Robot 00 Technology) AI foundation model for humanoid robots and major updates to its Isaac robotics platform.
24. Its balance sheet is in solid shape
At the end of the last quarter, Nvidia had cash and cash equivalents of $7.6 billion and long-term debt of $8.5 billion.
25. Employes really like working for Nvidia
On Glassdoor.com, Nvidia employees and former employees give the company an overall rating of 4.6 stars (on a scale of 1 to 5), as of June 7. Employee satisfaction is particularly important for companies in the technology realm, as there is a limited amount of top tech talent. Nvidia's rating is the highest of all the so-called Big Tech companies.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
