Nvidia's (NVDA 2.05%) stock has skyrocketed 226% so far in 2023, an impressive turnaround from the 50% drop it experienced amid last year's tech-led bear market. The company has wowed investors by becoming a leader in artificial intelligence (AI). Its role as the top supplier of graphics processing units (GPUs) to OpenAI's ChatGPT has seen it become a go-to for any AI-minded company seeking powerful hardware and services. As a result, Nvidia holds an estimated 80% to 95% market share in AI chips.
The tech giant has massive potential in the future of AI. However, bullish investors have also bid up the stock's valuation. So before going all in on Nvidia stock, it's wise to weigh up the positives and negatives of its business.
Here's one green flag and one red flag for Nvidia in 2023.
Green flag: Beating earnings expectations
On Aug. 23, Nvidia released its fiscal 2024 second-quarter earnings report. The company exceeded expectations with its 101% year-over-year rise in revenue, beating forecasts by over $2 billion.
The massive growth came alongside soaring demand for chips thanks to an increasing number of companies developing AI models. What's more, Nvidia projects an even bigger leap in revenue in its current quarter as it overcomes supply chain challenges quicker than expected. Nvidia shares have climbed 9% since Aug. 18 in anticipation of the positive results.
Nvidia has held a majority market share in discrete GPUs for years, which has seen it power millions of gaming PCs worldwide. Its stature in the market made gaming its highest-earning segment in fiscal years 2020, 2021, and 2022. While macroeconomic headwinds challenged Nvidia's PC business in 2022, its dominance in GPUs has perfectly positioned it to lead in AI.
Data centers are now the company's highest-earning segment as demand for GPUs has skyrocketed. Fellow chipmakers such as Advanced Micro Devices and Intel are developing chips to compete with Nvidia. However, Nvidia's years at the top could prove challenging to overcome.
At least for the short term, Nvidia looks poised to flourish as it remains the leader of the thriving AI market.
Red flag: An expensive buy
Bullish investors have driven triple-digit growth this year for Nvidia's share price. While the boost is a massive win for current stockholders, the price of entry for new investors has also gone through the roof. The chart below compares the forward price-to-earnings ratios (P/E) of six of the most prominent names in AI right now with Nvidia currently one of the priciest stocks in the industry.
Data by YCharts.
Forward P/E is a helpful metric for determining value as it compares a company's forecasted earnings with its stock price. An attractive forward P/E often hovers under 25, so Nvidia's position of nearly 59 for this metric makes it an expensive buy compared to other AI stocks.
So if you're considering investing in Nvidia this year, it's important to know that much of its anticipated growth is already priced into its shares. Consequently, prospective investors should plan to hold Nvidia stock for five to ten years minimum to see significant gains.
Alternatively, it might be worth investing in a better-valued stock like AMD, which has made promising strides in AI in recent months, or Microsoft, the biggest backer of OpenAI. Both companies have pivoted their businesses to the booming market and could go far in the coming years.
However, at the end of the day, Nvidia has taken the lead in arguably the most lucrative industry in 2023 and the foreseeable future. The company has a dominant command of the AI chip market. After rising over 200% already this year, Nvidia is an expensive option, but an investment in its stock could still pay off massively over the long term.
