One of the most anticipated events of the year is officially over. Less than 24 hours after the close of trading on Friday, June 7, the backbone of the artificial intelligence (AI) revolution, Nvidia (NASDAQ: NVDA)completed its straight 10-to-1 split.
A “stock split” is an event that allows publicly traded companies to cosmetically change their stock price and the number of shares outstanding by the same magnitude. It is cosmetic in the sense that stock splits have no effect on a company’s market value or operating performance. Stock splits can make shares more nominally accessible to retail investors, as with a forward stock split. They may also increase a company’s share price to ensure continued listing on a major stock exchange, as seen in reverse stock splits.
Investors have gravitated toward split stocks over the past three years because they have a track record of outperformance. More than a dozen high-profile stocks have announced and/or enacted forward stock splits since mid-2021, including Nvidia, which has just completed its second split since July 2021.
Nvidia gained $2.68 trillion in market value in just over 17 months
On paper, Nvidia has given investors every reason to jump on board and enjoy the ride. On June 5, Nvidia’s market capitalization surpassed $3 trillion for the first time, with the company surpassing Litter to second place among America’s largest publicly traded companies. Since the start of 2023, Nvidia has added around $2.68 trillion in market value, which has been entirely driven by AI.
Nvidia’s AI-inspired graphics processing units (GPUs) are the foundation of high-computing data centers. Based on varying estimates, Nvidia chips represent around 90% of the AI-GPU market share, with the ultra-popular H100 GPU powering generative AI solutions and helping train large language models.
Nvidia’s innovative edge is also driving gains. Some Wall Street analysts believe the company’s next-generation Blackwell chip, which costs between $30,000 and $40,000, will be sold out by 2025. With supply overwhelming demand, Nvidia has had no trouble raising the price of its AI-GPUs and reap the rewards of a massive increase in gross margin – 78.35% in the first quarter of fiscal 2025, ending April 28.
Even though Nvidia shares have risen 738% in just over 17 months, they still look reasonably cheap in fundamental terms. Although the stock currently trades at about 34 times annual earnings, the Wall Street consensus calls for an annualized earnings growth rate of 46.5% over the next five years.
On the surface, Nvidia looks perfect after its 10-for-1 stock split. But as an investor, I can’t judge a book by its cover alone.
History suggests Nvidia could be a ticking time bomb
Taking a step back, widening the lens, and allowing history to be my guide leads to a completely different view of Nvidia investing in the coming months and/or years. While there’s no denying that it’s firing on all cylinders and easily surpassing even the loftiest expectations thrown at it by Wall Street analysts, there are a handful of reasons why I wouldn’t touch Nvidia stock with a 10-foot pole. follow-up to their 10-for-1 split.
The main reason I want nothing to do with Nvidia has to do with the history of the next big innovations.
Since the advent of the Internet nearly three decades ago, Wall Street has had no shortage of upcoming trends expected to alter the growth arc of American companies. Some of these innovations include genome decoding, the rise of nanotechnology, business-to-business commerce, 3D printing, blockchain technology, the metaverse, and now artificial intelligence.
While some of these trends have been successful over the long term, they all share one thing in common (except AI): an early-stage bubble burst event. Investors have consistently overestimated the adoption of new technologies and innovations for more than 30 years. Every revolutionary innovation comes with immense promises and high expectations from analysts. Unfortunately, every innovation needs time to mature – and artificial intelligence is unlikely to be the exception. If and when the AI bubble bursts, there is no company that will take it longer than Nvidia.
Mind you, I have no idea when the AI bubble might burst. History shows that stock valuations can remain stretched for years before correcting. But possibly (keyword!), we witness each new innovation sail through a bubble bursting event.
We are also starting to see subtle “warnings” from Nvidia that the peak is here or close.
If you looked at Nvidia’s fiscal first quarter operating results and conference call, you would find nothing but positive comments from its management team. However, the company’s fiscal second quarter gross margin guidance of 75.5%, plus or minus 50 basis points, is the red flag I’m talking about.
After increasing your gross margin by 13.8 percentage points in one year, a predicted drop of 235 to 335 basis points (78.35% for a range of 75% to 76%) may sound like nothing. But it’s noteworthy when you consider that external competitors are starting to work on their own AI-GPUs. Additionally, Nvidia’s four main customers, which account for about 40% of its sales, are internally developing AI-GPUs for their data centers.
This predicted decline in sequential quarterly gross margin appears to signal that Nvidia’s pricing power has peaked. If the GPU shortage decreases, Nvidia’s pricing power will also decrease.
The third reason I want nothing to do with Nvidia after its now complete 10-for-1 stock split is, once again, history – but this time I’m talking about its valuation.
As I noted earlier, Nvidia is still relatively cheap based on its price-earnings-growth ratio (PEG ratio). But based on trailing 12-month (TTM) sales, Nvidia has reached a historic price level that rivals only Amazon It is Cisco Systems before the dotcom bubble burst.
At the end of March 2000, Cisco Systems peaked at nearly 39 times TTM sales. Meanwhile, Amazon surpassed TTM sales by 43 times in January 1999 before falling off a cliff. Nvidia is currently at a multiple of 38 times TTM sales.
History may not repeat itself perfectly on Wall Street, but it has a tendency to rhyme. For these reasons, I’m not going to touch this titan of artificial intelligence with a 10-foot pole.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions on Amazon. The Motley Fool has positions and recommends Amazon, Apple, Cisco Systems and Nvidia. The motley fool has a disclosure policy.
Nvidia has completed its 10-for-1 stock split: Here’s why I’m still not touching this artificial intelligence (AI) titan with a 10-foot pole was originally published by The Motley Fool
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