Can A Stock Split Help Drive Nvidia To A $3 Trillion Market Cap?

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Nvidia (NASDAQ: NVDA) posted a better-than-expected set of Q1 FY’25 results on Tuesday, amid a growing uptake for the company’s high-end GPUs for artificial intelligence applications. Revenues for Q1 more than tripled year-over-year to about $26 billion, while net profits were up over 7x to $14.9 billion. Nvidia stock jumped by almost 6% in after-market trading, touching the $1,000 mark for the first time as it announced that it would be splitting its stock 10-for-1, effective from June 7.

Nvidia’s Data Center segment – which primarily consists of the sales of accelerated computing chips for AI – came in at $22.6 billion, up 23% from Q4 FY’24 and up 427% from a year ago, while adjusted gross margins came in at a solid 78.9%, up from 67% in the year-ago quarter, driven by higher scale and software sales. The momentum is expected to hold up for Nvidia. Companies are looking to shift their sizable installed base of traditional data centers to accelerated computing to perform more artificial intelligence tasks. Moreover, while the initial AI models unveiled by the likes of OpenAI were largely text-based,  models are increasingly multimodal, working with speech, images, video, and 3D calling for higher computing power and a larger number of GPU shipments.    Nvidia’s accelerated computing chips remain meaningfully ahead of rivals such as AMD and Alphabet’s Tensor processing units in terms of performance at the moment. Moreover, the company has built an ecosystem around its AI tools, with its programming languages, and software, which are helping the company drive incremental sales and lock in customers. Nvidia’s outlook is also strong, with the company guiding for about $28 billion in revenue for Q2 FY’25, ahead of Street estimates and about 2x compared to the year-ago quarter. While the supply of Nvidia’s H100 chips is improving (estimated waiting time of just a few weeks, down from over a year previously), Nvidia says that demand for H200 and the new Blackwell architecture chips is well ahead of availability, with supply expected to lag demand well into the next year.

Now with the strong performance of Nvidia’s core business, the stock has posted extremely strong gains of 630% from levels of $130 in early January 2021 to around $950 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in NVDA stock has hardly been consistent. Returns for the stock were 125% in 2021, -50% in 2022, and 239% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NVDA underperformed the S&P in 2022.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The stock split announcement could result in some near-term gains for Nvidia stock. Although splits don’t change the fundamentals of a company, they often cause a run-up in the stock price post-announcement. These stocks also tend to outperform for two reasons. Firstly, they make stocks more accessible to smaller investors, driving up demand for the shares. Secondly, they indicate that management is confident about the company’s prospects and that growth could remain strong.

Looking at Nvidia’s current market price of about $1000 per share (based on after-hours trading), the stock now trades at about 40x consensus 2025 earnings and 31x 2026 earnings. Although this is not an unreasonable multiple, considering Nvidia’s heady growth, there are risks as well. Firstly, the big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs. Moreover, at the current valuation, the market might be pricing in that Nvidia will essentially own the AI chip market. However, this may not be the case. Players such as AMD are investing considerably to catch up in this space given the high stakes. Additionally, big tech players such as Google, Microsoft, and Amazon are also doubling down on developing their own AI and machine learning-related silicon. This could also pose a risk for Nvidia, as the big tech players remain the company’s largest customers. We value NVDA stock at $892 per share, about 10% below the current market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock.

 Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 NVDA Return 10% 91% 3453%
 S&P 500 Return 6% 12% 138%
 Trefis Reinforced Value Portfolio 7% 7% 659%

[1] Returns as of 5/23/2024
[2] Cumulative total returns since the end of 2016

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