The hottest stock on Wall Street, Nvidia (NVDA -0.36%), is enacting a stock split on June 7. The following trading day, June 10, Nvidia's stock price will be reduced by one-tenth, causing the number of shares to increase tenfold. After that date, the stock will be trading for around $100 rather than $1,000.
Although stock splits excite investors, there are far better reasons to buy Nvidia's stock than just the stock split. I've come up with three good reasons, but many more could have been included.
1. Nvidia is still growing at a rapid pace
Nvidia's incredible performance since the start of 2023 (the stock is up around 650%) has been directly tied to the artificial intelligence (AI) race. Nvidia's primary products are graphics processing units (GPUs), which are incredibly useful in processing AI models because they can compute in parallel. Because Nvidia's GPUs are best in class, they quickly became the top pick for anyone looking to increase their AI computing power dramatically.
This directly translated into jaw-dropping revenue growth for a company of Nvidia's size. In the first quarter of fiscal year 2025 (ending April 28), Nvidia's revenue rose 262% year over year. While that's a mind-blowing figure, this will likely be the last quarter with a growth rate that high. Now, Nvidia is starting to come up against stronger year-over-year comparisons, so this growth rate will likely decelerate.
Instead, investors can also look at the quarter-over-quarter growth rate. For Q1, this figure was 18%, which is still a blazing-fast growth rate. In Q2, management expects revenue of $28 billion, indicating about 8% quarter-over-quarter growth. While that's a slight slowdown, management may be sandbagging its guidance. In the fourth quarter of FY 2024, it guided for $24 billion in Q1 revenue, indicating a 9% quarterly growth rate. And it beat that projection handily.
The consequences of missing guidance far outweigh those of exceeding projections, so management has nothing to gain by issuing less aggressive guidance. Investors should keep this in mind, as there are almost no signs of Nvidia's growth slowing down.
2. New products may drive an upgrade cycle
Nvidia's H100 is the industry standard in data center GPUs. While this remains a top pick, Nvidia's H200 is the latest and greatest technology.
Compared to the H100 GPU, it runs large language models at up to two times the speed of the H100. Furthermore, the H200 is also more efficient and uses about half of the energy as the H100 when running a similar AI model.
Energy input costs are a massive operating expense for data centers, and upgrading to H200s may offer potential cost savings for many of the largest players in the space.
Although its H100 GPU is already industry-leading, Nvidia's H200 looks to be an upgrade in nearly all aspects. This could lead to an upgrade cycle, which will keep the demand for Nvidia's GPUs thriving for years to come.
Nvidia also plans to launch its new Blackwell architecture and most powerful chip ever later this year -- yet another tailwind for Nvidia stock.
3. The stock isn't as expensive as investors may think
Thanks to Nvidia's incredible rise, its stock has become quite expensive due to the lofty expectations built into it. That's why using the traditional price-to-earnings (P/E) ratio isn't as useful when assessing Nvidia's stock. The stock market is a forward-looking machine, so investors should use a metric that measures forward earnings, like the forward price-to-earnings (P/E) ratio.
At 41 times forward earnings, Nvidia isn't a cheap stock by any stretch of the imagination.
NVDA PE Ratio (Forward) data by YCharts
However, when you compare it to other big tech companies, it doesn't look so bad. Although Nvidia is more expensive, it's still priced in a range similar to Amazon (39 times forward earnings) and Microsoft (35 times forward earnings).
Both of these are great companies, but Nvidia's upside far exceeds that of the other two. So, if you're looking for a stock with a higher ceiling than Amazon and Microsoft, Nvidia is a great pick.
While many investors are excited about the stock split because it will make the stock more accessible to investors without access to fractional shares and options traders, these are far better reasons to own the stock.
