The artificial intelligence steam train that is Nvidia (NVDA 1.14%) finally overtook Apple and Microsoft to become the most valuable company on the planet by market capitalization. This comes on the heels of the company's 10-for-1 stock split earlier this month. Investors saw the number of their shares multiplied by 10, while the share price became a tenth of where it was before.
A split like this is somewhat cosmetic in that it doesn't change the value of people's investments directly. But there's often an indirect effect. In Nvidia's case, more people who don't have access to fractional trades can now afford shares who couldn't before when they were trading around $1,200. The lower stock price also makes options trading more accessible.
This brings new money into the market and can bump up the price, which did indeed happen.
The stock is up about 12% since the split, giving Nvidia enough steam to take the No. 1 spot. So, if it's already the most valuable company in the world, is it too late to get in? Let's consider.
NASDAQ: NVDA
Key Data Points
Nvidia can't seem to stop making money
The company delivered incredible revenue growth quarter after quarter for years with only a slight decline during the market downturn in 2022. The growth in quarterly revenue has an inflection point in 2023 -- that's when the company's AI business really took off.
NVDA revenue (quarterly) data by YCharts.
This growth looks to continue for the foreseeable future. The company expects $28 billion in revenue this quarter, almost a $2 billion bump from last quarter.
To say CEO Jensen Huang is optimistic would be an understatement. "The next industrial revolution has begun ... AI will bring significant productivity gains to nearly every industry," Huang said.
Now, take this with a pretty massive grain of salt. CEOs, especially tech CEOs, are prone to making some pretty big claims that they can't always back up. But Huang's ability to captain Nvidia to where it is today speaks to his vision.
A word of caution: The competition is heating up
You don't get to be the most valuable company in the world without others gunning for your position. Several companies are spending liberally to try to catch up with the AI pioneer.
Advanced Micro Devices is probably the single company with the best shot of replicating Nvidia's chip power at scale. It spent $1.5 billion last quarter on research and development. And although it released some pretty impressive technology, it hasn't yet matched Nvidia.
And here's the kicker: For every dollar AMD spent last quarter on R&D trying to catch up, Nvidia spent two shoring up its pole position.
OK, but don't forget about valuation
But while Nvidia can defend itself against AMD and continue delivering the growth that it has, there is a ton of hype around it. That could mean it's overvalued. If you look at the company's price-to-earnings (P/E) ratio, that might look to be the case.
Nvidia has a P/E of 79.4. That's pretty high. What about the two companies it just surpassed? Microsoft and Apple have a P/E of 38.7 and 33.3, respectively.
While that might give you reason to pause, it's not really the most accurate picture. The earnings considered in the P/E ratio are for the trailing 12 months. Nvidia is still in high-growth mode; Apple and Microsoft are growing but are in a more stable position.
A different metric, the forward price/earnings-to-growth (PEG) ratio, is a better choice here. This is its current price compared to its (expected) growth rate over the next year. Here, Nvidia looks much more reasonably priced -- better even than Apple and Microsoft. Take a look at this chart showing the different ratios.
NVDA PEG Ratio (Forward) data by YCharts
Nvidia might be trading at a premium today, but I still believe it's justified given reasonable expectations of the company's growth. But keep an eye on whether the company delivers on the promised growth.
