Nvidia's (NVDA 1.29%) recent stock split lowered the price of each individual share after the high-flying stock reached beyond $1,000 and ever since that split a little more than a week ago, the shares have advanced about 12%. This momentum has helped the chip designer reach an enormous milestone. Nvidia just passed Microsoft to become the world's most valuable company with a market value topping $3.33 trillion as of market close on Tuesday -- that's compared to the rival software giant's $3.31 trillion market capitalization.
There's been a good reason for Nvidia's standout performance in recent times: its dominance in the billion-dollar artificial intelligence (AI) chip market. The company holds an 80% share and this has helped earnings -- and clearly share price -- to soar. After the enormous gain, and as Nvidia steps ahead of Microsoft, the question now is: Is it too late to invest in this AI chip giant? Let's find out.
Image source: Getty Images.
How Nvidia has come this far
Nvidia's graphics processing units (GPUs) once were best known for powering video games and this helped Nvidia remain financially successful over time. But the AI boom marked a turning point for the company as potential customers realized how particularly well-suited Nvidia's GPUs were to crucial AI tasks. This is thanks to the GPU's ability to process many jobs simultaneously, making this chip ideal for things like the training and inferencing of AI models.
But Nvidia hasn't stopped with the GPU and instead created a broad range of products and services -- such as enterprise software -- to support AI customers along the development path. And this has resulted in triple-digit increases in revenue and profit in recent quarters. For example, in the past quarter, Nvidia's revenue reached a new record high of $26 billion -- and revenue linked to AI customers made up a whopping 86% percent of that.
As mentioned above, all of this boosted the stock price and prompted Nvidia to announce a 10-for-1 stock split. The goal? To bring the stock to a level that would make it easier for employees and investors to access it. From the announcement in late May to the actual operation earlier this month, Nvidia shares climbed nearly 30%, and they've continued to add to gains.
NASDAQ: NVDA
Key Data Points
Nvidia's increasing valuation
Now, let's return to our question. Since Nvidia has climbed to a value above technology powerhouse Microsoft's, is it too late to get in on the stock? A look at valuation shows us that Nvidia is considerably more expensive than it was only a month ago. Today, the stock trades for more than 51x forward earnings estimates compared with about 30 in May.
NVDA PE Ratio (Forward) data by YCharts
So does this mean you should hold off on buying this skyrocketing stock? Not necessarily. Yes, Nvidia is more expensive than it was a few weeks ago, but the stock is worth the premium for two reasons: its current leadership in the high-growth AI chip market, and most importantly, the steps it's taking to remain in that position.
Nvidia has committed to updating its GPUs annually, recently saying that after the launch of its new Blackwell architecture and chip later this year, "other Blackwells" will follow. This means that even if rivals release new chips, Nvidia, already in the lead, should remain ahead in terms of product performance.
On top of this, it's important to remember two other things. First, Nvidia already has secured its reputation as an expert in the AI chip market, and demand for its products and services is surpassing supply -- so it's already in a position of strength. And the innovation I just mentioned could keep this going. Second, the AI growth story is in its early days, with today's $200 billion AI market expected to reach more than $1 trillion by the end of the decade. As a result, Nvidia's AI growth may have a lot farther to go.
All of this means that today, even with Nvidia soaring past Microsoft, the investment opportunity is far from over -- and Nvidia still is a top stock to buy and hold for the long term.
