Nvidia’s (NVDA) stock price has soared to unprecedented heights, fueled by the AI boom and the company’s dominant position in the GPU market. It’s market cap briefly touched $3.5 trillion on Friday. However, this meteoric rise has raised questions about its valuation. Is the future already priced into the stock, or are there still significant upside opportunities?
The AI Gold Rush
Nvidia’s GPUs have become the de facto standard for AI and machine learning applications. The company’s powerful chips are essential for training and running complex AI models, driving demand from both consumers and enterprise customers.
This surge in demand has translated into impressive financial performance for Nvidia. The company has consistently delivered strong revenue and earnings growth, fueled by the AI boom.
The Valuation Question
While Nvidia’s growth prospects are undeniably strong, its valuation has reached stratospheric levels. The stock’s price-to-earnings (P/E) ratio is significantly higher than the industry average and the broader market. That’s understandable for a fast-growing stock. Assuming that NVDA becomes a more mature stock in a few years and keeps growing at the same rate the entire stock market grows. A mature but growing company usually gets a price-earnings ratio of around 20. This means currently NVDA’s stock price implies that it will be generating after tax profits of $175 billion a year if it manages to retain its dominance in the chip industry.
Over the last 12 month period NVDA generated $96 billion in sales and $53 billion in net income. So, basically, investors basically assume that NVDA will be able to triple its revenue and profits until it becomes a more mature company.
If that happens, NVDA stock will return zero percent. The investors who are buying NVDA stock today are assuming that Nvidia will deliver even better results than tripling its revenue and profits. I personally own NVDA, but I am not convinced that the company can deliver these lofty expectations.
While Nvidia’s future looks promising, investors should exercise caution and consider the risks associated with its high valuation. It’s important to assess whether the current price reflects the company’s long-term growth potential or if there’s a bubble forming.
While I acknowledge the potential of NVDA as an investment, my conviction lies in the belief that some other AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: Long NVDA. This article was originally published at Insider Monkey.