Over the past few years, investors looking for a top artificial intelligence (AI) stock have rushed to Nvidia (NVDA 0.85%). The company dominates the AI chip market, holding an 80% share, thanks to the top performance of its graphics processing units (GPUs). The GPU has the ability to handle multiple tasks simultaneously, making it the perfect match for the high speed needed in AI training, inferencing, and much more.
This has resulted in explosive earnings growth for the company that once mainly served the video games industry. In recent quarters, revenue and net income both have climbed in the triple digits. This also has fueled share price performance, boosting the stock more than 500% over the past three years -- and helping the stock soar past $1,200 a few weeks ago.
If you think that price tag is too high, though, not to worry. Nvidia recently split its stock, bringing it down to one-tenth of its original price. Since the June 7 operation, the stock has traded between $120 and $135. Does this mean -- particularly if you balked at the tech giant's $1,000-plus price tag earlier -- that now is the time to buy? Let's find out.
Image source: Getty Images.
How Nvidia reached the top
First, a bit of detail about how Nvidia reached its top position. The company, as mentioned, transitioned from serving primarily video game companies to now focusing on AI customers. Nvidia still brought in $2.6 billion in sales from the gaming unit in the most recent quarter, but the company's data center unit far surpassed that, delivering a record of more than $22 billion in revenue. That's on total revenue of $26 billion.
Nvidia's GPUs are the fastest on the market, and along with these powerful chips, Nvidia offers AI customers a wide variety of products and services. One of these is enterprise software, a sort of operating system for AI that streamlines, secures, and manages the deployment of AI projects. ControlExpert used Nvidia AI Enterprise to create a system allowing insurers to process claims in one day, for example. And customers can access Nvidia's products and services across all public clouds, meaning it's very easy to find these top AI tools.
Moving forward, there's reason to be optimistic about Nvidia holding on to its leading position in the market. Though rivals have multiplied and are bringing new, high-performance chips to market, Nvidia pledges to update its GPUs on an annual basis. This means it's very likely that, even if a rival releases a better chip, a few months later, Nvidia's GPU update will keep it in the lead from a performance perspective.
Nvidia's kicking off this promise of ongoing innovation with its launch of the Blackwell architecture and chip later this year, a game-changing platform that investors and customers have been eagerly awaiting. The company says demand for Blackwell has surpassed supply, and it expects this to continue into next year.
I also like the explosive growth we're seeing in Nvidia's free cash flow and return on invested capital, indicating the chip giant has what it takes to invest in growth -- and so far, these investments have been bearing fruit.
NVDA Free Cash Flow data by YCharts
The AI growth story
On top of this, it's important to remember that we're in the early days of the AI growth story, with the market expected to soar past $1 trillion later this decade. This suggests Nvidia's momentum could continue as companies invest more and more in AI development.
So with the new price tag well under $150, is it time to buy Nvidia? Well, technically, Nvidia isn't cheaper than it was a few weeks ago. In fact, it's actually a bit more expensive, today trading at 46x forward earnings estimates, compared with about 30x.
This is because a stock split lowers the price of each individual share by issuing more shares to current holders -- but this mechanical move doesn't alter the market value of the company or lower the valuation of a stock. Nvidia has become more expensive in relation to future earnings estimates in recent weeks because the stock has steadily climbed.
But, considering these points I mention, Nvidia is worth today's price -- and if you hold on to a stock for the long term, short-term fluctuations in the price (and valuation) won't impact your returns by very much.
All of this means that today, trading for less than $150 a share, Nvidia makes a top AI growth buy.
