1 green flag for Nvidia in 2023 and 1 red flag

NVIDIA‘s (NVDA -2.43%) Shares have soared 226% so far in 2023, an impressive turnaround from the 50% plunge it experienced amid last year’s tech-led bear market. The company has wowed investors by becoming a leader in artificial intelligence (AI). Its role as the leading provider of graphics processing units (GPUs) for OpenAI ChatGPT has made it a choice for any AI-minded company looking for powerful hardware and services. As a result, Nvidia has an estimated 80% to 95% market share in AI chips.

The tech giant has huge potential in the future of AI. However, bullish investors have also increased the valuation of shares. So before betting on Nvidia stock, it is wise to weigh the positives and negatives of its business.

Here’s a green flag and a red flag for Nvidia in 2023.

Green flag: exceeding earnings expectations

On August 23, Nvidia released its fiscal 2024 second-quarter earnings report. The company exceeded expectations with a 101% year-over-year increase in revenue, beating forecasts by more than $2 billion.

The massive growth was accompanied by increasing demand for chips thanks to an increasing number of companies developing AI models. What’s more, Nvidia projects an even bigger jump in revenue in its current quarter as it overcomes supply chain challenges faster than expected. Nvidia shares have risen 9% since August 18 in anticipation of the positive results.

Nvidia has had a majority share of the discrete GPU market for years, which has seen it power millions of gaming PCs around the world. Its stature in the market made gaming its highest-earning segment in fiscal years 2020, 2021 and 2022. While macroeconomic headwinds challenged Nvidia’s PC business in 2022, its dominance in GPUs has positioned it perfectly. to lead in AI.

Data centers are now the company’s highest-earning segment as demand for GPUs has skyrocketed. Other chip makers like advanced micro devices and Intel they are developing chips to compete with Nvidia. However, Nvidia’s years at the top could prove hard to top.

In the short term at least, Nvidia looks poised to thrive as it remains the leader of the thriving AI market.

Red flag: an expensive purchase

Bullish investors have fueled triple-digit growth this year in Nvidia’s stock price. While the boost is a huge win for current shareholders, the price of entry for new investors has skyrocketed as well. The chart below compares the forward P/E ratios of six of the biggest names in AI right now with Nvidia, currently one of the most expensive stocks in the industry.

YCharts data.

Forward P/E is a useful metric for determining value, as it compares a company’s expected earnings to its stock price. Attractive forward P/E often hovers below 25, so Nvidia’s ranking of nearly 59 for this metric makes it an expensive buy compared to other IA stocks.

So if you’re considering investing in Nvidia this year, it’s important to know that much of its anticipated growth is already priced into its stock. Consequently, potential investors should plan to hold Nvidia stock for a minimum of five to 10 years to see significant gains.

Alternatively, it might be worth investing in a higher valued stock like AMD, which has made promising strides in AI in recent months, or Microsoft, the largest sponsor of OpenAI. Both companies have oriented their businesses towards the booming market and could go far in the coming years.

However, at the end of the day, Nvidia has taken the lead in arguably the most lucrative industry in 2023 and for the foreseeable future. The company has a dominant hold on the AI ​​chip market. Having risen more than 200% this year, Nvidia is an expensive option, but an investment in its stock could still pay off big in the long run.