Nvidia: The AI Stock to Buy Now or a Cautionary Tale?

Nvidia Corporation (NVDA) has been a standout performer in the tech sector, driven by its dominance in the GPU market and leadership in AI and data center markets. With a market capitalization of over $900 billion, Nvidia is on the cusp of becoming the world's first trillion-dollar chip stock. However, investors should exercise caution before chasing after the recent surge in Nvidia's stock price.

Nvidia reported a first-quarter profit of $1.09 a share, ahead of forecasts for 92 cents, and offered second-quarter revenue guidance of $11 billion, nearly $4 billion more than the $7.15 billion consensus. The company's strong performance was attributed to the growing demand for chips with enough power to handle artificial intelligence, particularly generative AI. Nvidia's Chief Financial Officer, Colette Kress, stated that the company was already taking steps to meet high demand during the second half of its fiscal year.



Analysts are bullish on Nvidia's prospects, with Susquehanna analyst Christopher Rolland predicting that the company's four segments—auto, data center, gaming, and professional visualization—could grow at a rate at least three times that of semiconductors generally. Rolland upped his price target on the stock to $450 from $350. Needham analyst Rajvindra Gill also expressed optimism, stating that nearly all past headwinds for Nvidia are behind the company, and it is shipping to true, AI-related demand.

However, investors should be cautious about chasing after Nvidia's recent gains. The stock is already expensive based on estimates, trading at 47.4 times 12-month forward earnings. Whether Nvidia can live up to those estimates depends on how long companies continue to spend big to catch up in AI. If demand slows after this fiscal year, the stock would look even more expensive.

Moreover, Nvidia is not the first company to hit the trillion-dollar market capitalization threshold. There have been just six in the U.S.— Apple, Amazon, Alphabet, Microsoft, Meta, and Tesla. While hitting $1 trillion would be a big deal for Nvidia, staying there would be a bigger one. Apple, Amazon, Alphabet, and Microsoft all fell after hitting it for the first time, while Meta and Tesla, with market caps of $666 billion and $601 billion, respectively, still haven't reclaimed that level.

In conclusion, Nvidia's strong performance in the GPU, AI, and data center markets has positioned it as a potential money-making stock to buy now. However, investors should exercise caution and monitor the company's progress closely, as the stock is already expensive based on estimates, and the sustainability of its growth depends on the continued demand for AI-related products.